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Micromort

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Re: Micromort

#51

Post by shock-value »

gbog wrote: post #44
eli wrote: post #21

Earlier quoted context omitted.

I gladly pay my life insurance premium because I want to know my loved ones will be taken care of. It's not a scam. I fully intend to pay in more than I get out of it (I hope!!). Lottery isn't really a scam either if you derive pleasure simply from playing the game.

Yes but a fair insurance would be the exact price of the risk leveled among insured, plus a small processing fee. There should be not one penny left for luxurious offices or prestigious ads or art mecenat. Lottery pleasure is empty. Play poker with friends, you may loose money but at least you get friends. The problem pointed in Kahneman book is that we are irrational, and (AND) it's usually the less irrational among…

> plus a small processing fee

Okay, but small is relative.

For example, an insurance company has to pay for investigators, the number of which would likely scale linearly with customers.

Nice offices and an advertising presence are also likely necessary to entice and maintain customers, probably more-so an an industry like insurance in which there aren't many tangible differentiators between competitors (see Coke vs Pepsi).

I don't see why insurance should be any different than any other industry regarding these issues and also the existence and legitimacy of profits (assuming they weren't derived from fraud).

Re: Micromort

#52

Post by nazgulnarsil »

gbog wrote: post #44
eli wrote: post #21

Earlier quoted context omitted.

I gladly pay my life insurance premium because I want to know my loved ones will be taken care of. It's not a scam. I fully intend to pay in more than I get out of it (I hope!!). Lottery isn't really a scam either if you derive pleasure simply from playing the game.

Yes but a fair insurance would be the exact price of the risk leveled among insured, plus a small processing fee. There should be not one penny left for luxurious offices or prestigious ads or art mecenat. Lottery pleasure is empty. Play poker with friends, you may loose money but at least you get friends. The problem pointed in Kahneman book is that we are irrational, and (AND) it's usually the less irrational among…

Humans are not homo economicus.

Re: Micromort

#53

Post by batiudrami »

gbog wrote: post #40
batiudrami wrote: post #35

Earlier quoted context omitted.

Insurance isn't a scam. You pay a little extra to ensure that you can get the money before you would have saved it (assuming you put your entire ensurance premium into savings) in the event that you (or your family, in the case of life insurance) need it. Sure, in infinite (or sufficiently high) number of lives/events, you'll always end up behind, but that doesn't mean it's a scam.

Do you agree that we are very bad at evaluating very low probabilities (below .1%)? Then how much would you bet on the hope that insurance companies are not taking advantage of this psychological weakness for their benefit?

I agree with both your points there, but disagree with the premise that insurance is a scam - the insurance companies provide a valuable service, and they charge what people will pay - the way any reasonable business is going to behave.

From there, it's up to you to determine whether it's worth it. I personally don't have health insurance (though I live in a country with universal healthcare), but I have 3rd-party car insurance in case I accidentally drive into someone's Lamborghini, and it was fortunate that my girlfriend's dad had life insurance so that her mum had some money after he passed away prematurely last year. Just because money is being made doesn't mean it's a scam.

Re: Micromort

#54

Post by aaron695 »

gbog wrote: post #18

It should be noted that used in Thinking Fast and Slow context this micromort induce can be used to show how much we human have very hard time grasping low probability events. All the lottery and insurance business is just a scam against us taking advantage of this miss computation of micro risks.

Agreed, and the fact people here think insurance is not a scam is actually proving your point how they can't measure risks well even when pointed out to them.

If you house burns down, sure that's reasonably catastrophically bad, But if you house burns down, there's a fair chance it'll happen at night, and there's is a fair chance you'll die.

Don't spend money on insurance, spend it on stopping your house burning down.

If there's a risk of it happening then the money should be spent on reducing that risk, not wasting it on, if I survive at least I won't be poor.

Re: Micromort

#55

Post by lucasjans »

gbog wrote: post #40
batiudrami wrote: post #35

Earlier quoted context omitted.

Insurance isn't a scam. You pay a little extra to ensure that you can get the money before you would have saved it (assuming you put your entire ensurance premium into savings) in the event that you (or your family, in the case of life insurance) need it. Sure, in infinite (or sufficiently high) number of lives/events, you'll always end up behind, but that doesn't mean it's a scam.

Do you agree that we are very bad at evaluating very low probabilities (below .1%)? Then how much would you bet on the hope that insurance companies are not taking advantage of this psychological weakness for their benefit?

Even if all insurance companies are using fear to sell their product, they still have to compete with each other. The insurance industry is the boring financial industry, but is very vast with many nooks and crannies. The companies are making financial gambles estimating risk. And not every company has the same model or the same strategy. Some risks pay off, and sometimes they don't. And from what I understand, in the property and casualty business, the profit the companies make typically comes from investments of their capital and not their loss rates.

If you don't see the value of insurance, then don't buy it unless the law requires. And if you don't like the law, then do something about it.

But if you're family has money, or if you do, it would be smart to put a few bucks into your insurance policy and relax knowing that your capital is not at risk. And if you don't have a lot of money, its nice to know that there's cash available for you when something bad happens.

Re: Micromort

#56

Post by aaron695 »

batiudrami wrote: post #53
gbog wrote: post #40

Earlier quoted context omitted.

Do you agree that we are very bad at evaluating very low probabilities (below .1%)? Then how much would you bet on the hope that insurance companies are not taking advantage of this psychological weakness for their benefit?

I agree with both your points there, but disagree with the premise that insurance is a scam - the insurance companies provide a valuable service, and they charge what people will pay - the way any reasonable business is going to behave. From there, it's up to you to determine whether it's worth it. I personally don't have health insurance (though I live in a country with universal healthcare), but I have 3rd-party ca…

But why are you worried about driving into a Lamborghini and not the fact it would mean you've had a car accident and you could be dead?

This to me is where our perceived realities differ with real life.

Spending the money on defensive driving and/or car safety makes much more sense, but we can only see the future where the accident happens (And we survive) not all the accidents we can stop.

I have no idea about your girlfriends father and what happened but I'd prefer to spent money on not dieing than paying for what happens if I do.

Re: Micromort

#57

Post by Houshalter »

nazgulnarsil wrote: post #50
whatshisface wrote: post #37

Earlier quoted context omitted.

Insurance is not intended to pay out more money than you put in, it is intended to prevent gambler's ruin. Some extra money when you are in trouble is worth more than the money itself, it is also worth the trouble it gets you out of.

Or put another way: In your life you are optimizing over more than just money. Insurance is a way to reduce variance, and thus stress, and is therefore worth a nominal fee.

Another reason is what I believe economists call it "the law of decreasing marginal utility". Every extra dollar you have is (usually) worth less and less, since you pay for the things you want/need the most first, and money is only worth what you buy with it.

Your expected utility is not your expected dollars. The average person will pay more into insurance than they get out of it. However it's worth it for the small chance that disaster could strike and you could lose everything. Better to sacrifice a small amount of utility to prevent losing a large amount from becoming homeless.

Re: Micromort

#58

Post by beloch »

If a day spent skiing raises your chance of dying by less than drinking half a liter of wine, you're probably not very much fun to ski with!

Re: Micromort

#59

Post by gbog »

nazgulnarsil wrote: post #52
gbog wrote: post #44

Earlier quoted context omitted.

Yes but a fair insurance would be the exact price of the risk leveled among insured, plus a small processing fee. There should be not one penny left for luxurious offices or prestigious ads or art mecenat. Lottery pleasure is empty. Play poker with friends, you may loose money but at least you get friends. The problem pointed in Kahneman book is that we are irrational, and (AND) it's usually the less irrational among…

Humans are not homo economicus.

Sure and that's why they are easy to beat. How many industries would not even exist if human were rational? And again, the most rational ones have less loss aversion, take more pondered risks, invest in what has real value (education) and usually win the game in the end.

Re: Micromort

#60

Post by gbog »

Houshalter wrote: post #57
nazgulnarsil wrote: post #50

Earlier quoted context omitted.

Or put another way: In your life you are optimizing over more than just money. Insurance is a way to reduce variance, and thus stress, and is therefore worth a nominal fee.

Another reason is what I believe economists call it "the law of decreasing marginal utility". Every extra dollar you have is (usually) worth less and less, since you pay for the things you want/need the most first, and money is only worth what you buy with it. Your expected utility is not your expected dollars. The average person will pay more into insurance than they get out of it. However it's worth it for the smal…

My point is not that insurance in itself is a scam. It would be rational to pay a small fee to a common account and get back much more when needed. It is how most communities work.

My point is that the current insurance system and price is a scam, because it is much too expensive and covers to many silly cases. That's because it is very hard for human beings to evaluate the risk of something rare and its price. While this evaluation is exactly the job of insurance companies. It is the classic situation for a scam: the buyer can't know the real price. And we also have the symptoms: way too much money is spent on luxury in this industry, they have the most expensive tv ads, etc.

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