Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Micromort

en.wikipedia.org

Post reply on HN
Print view View original

81–90 of 102 posts

Re: Micromort

#81

Post by [deleted] »

gbog wrote: post #61
shock-value wrote: post #51

Earlier quoted context omitted.

> 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…

It is different in this that you can't evaluate the price of the thing you buy. It's like contemporary art if you will, but art is more obviously a scam, while insurance have an aura of solidity and serious.

[deleted]

Re: Micromort

#82

Post by gbog »

Houshalter wrote: post #62
gbog wrote: post #60

Earlier quoted context omitted.

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…

The buyer never knows the real price in any industry . How many people know how much it takes to build a factory, to pay the wages of all the workers, transportation costs, material costs, etc, etc. Competition is supposed to lower the price to it's actual amount. I don't see why this isn't true in the insurance industry.

In most other industries you can evaluate the price asked against the utility of the product out the service.

Re: Micromort

#83

Post by deletes »

jlgreco wrote: post #26
andrewvc wrote: post #3

A lot of this seems weird. If I imbibe 0.5 liters of wine exactly once in my life I doubt there's any effect. Same for 2 cigarettes. For a lot of things there are thresholds that must be crossed before any effect is created.

It seems pretty clear that, to come up with these numbers, they took mortality figures from people with lots of exposure, divided their exposure down into small chunks, and assumed that everything scaled linearly. I mean really, 1 hour in a coal mine and you get black lung? Absurd. Would 1 minute in a coal mine be 1/60th of a micromort? Would 1 second in a coal mine be 1/3600th of a micromort? Of course not, and of c…

The statement >>1 hour in a coal mine and you get black lungBy staying in a coal mine for 1 hour you increase the chance of death by 1 micromort, that by definition means if you did that for about a million times you would very probably die. If the average life expectancy is about 613000 hours, and if you spend every living hour in a coal mine you would still live every other lifespan.

Re: Micromort

#84

Post by actuary »

gbog wrote: post #60
Houshalter wrote: post #57

Earlier quoted context omitted.

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 is quite incorrect.

I am a credentialed actuary responsible for the pricing of insurance risk. It is absolutely true that the consumer cannot price his or her own insurance policy (and I can). However, the end result of this is not some nefarious scenario where insurance companies are charging consumers ten times the fair price to insure their car or home. There is a functioning market for insurance, and consumers are going to tend to select the lowest-price option from amongst their choices in that market. This means that if you overcharge your customers, you will lose them to a competitor. Systematic mispricing of policies relative to the competition will lead to adverse selection, which is even worse - the insureds that you were making money on leave, and the insureds that you were losing money on stay.

Because of these factors, the insurer's goal is to price your policy as accurately as possible. Profit margins in the personal lines are so thin that many insurers engage in what's called cash-flow underwriting. The only money they make on the policy is the investment income they earn on your prepaid premium.

On top of all this, insurance (especially insurance marketed to consumers) is heavily regulated. Rate changes and new rating plans are scrutinized by each state's department of insurance. These regulators function like you wish the banking regulators did. They have enormous authority and their relationship with insurers is adversarial.

I could go on at some length but I will cut it off here. Suffice it to say that insurance, particularly property/casualty insurance in the United States, is about as far from a scam as you can get.

Re: Micromort

#85

Post by gbog »

actuary wrote: post #84
gbog wrote: post #60

Earlier quoted context omitted.

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 is quite incorrect. I am a credentialed actuary responsible for the pricing of insurance risk. It is absolutely true that the consumer cannot price his or her own insurance policy (and I can). However, the end result of this is not some nefarious scenario where insurance companies are charging consumers ten times the fair price to insure their car or home. There is a functioning market for insurance, and consume…

Hi,

Your strongest point is competition, but competition only works fully for economically rational agents, which we are not.

Regulations are making my point stronger: they exist because without them the clients would be defenseless.

Sorry to be short, I'm on a phone.

Re: Micromort

#86

Post by Dylan16807 »

njr123 wrote: post #74
Dylan16807 wrote: post #36

Earlier quoted context omitted.

You're dodging the question. You can achieve statistical significance by using a large sample size, iff there is a real effect. If we had 10e20 people in each group and gave an extra 0.5 liters of alcohol to each one, would you be shocked that a millionth of them died?

Yes, I would be shocked if an extra millionth died, because we have done many many studies of alcohol consumption, and they show that below a certain level (40ml a week or something?) there is no measurable effect on health.

I thought wine was supposed to be vaguely positive?

Re: Micromort

#87

Post by eli »

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…

Insurance is about managing risk. I willingly and happily pay extra money spread over many small payments to eliminate the risk of a single rare event (e.g. A car accident that's my fault) from totally ruining my life.

Re: Micromort

#88

Post by cdjk »

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.

Lottery - sure, that's a scam, barring the odd situation where a positive expected value is possible. Insurance on small events (i.e. the extended warranty from Best Buy) could be described as a scam, but homeowners insurance/car insurance isn't.

The whole reason insurance exists is because of differences in risk tolerance. What is a huge risk for me, such as a fire destroying my house, is a relatively small risk for an insurance company that is insuring against fires across the entire state. What I pay the insurance company for is to assume part of that risk.

Consider homeowners insurance, and more specifically fire insurance, in this admittedly contrived example. Suppose that in the next year there's a 1/1000 chance of a fire that will cause damage that will cost $100k to repair. That has an expected value of $100. Well, since $100k is a lot of money to me, I'd rather pay someone $200 than take a bet with an expected cost of $100, even though paying $200 has a negative expected value. That means I am risk averse for potential gains and losses on the order of $100k, and would rather take the more certain side of a bet, even if it means it has a lower expected value.

Take another example. Suppose I'm worried about losing or breaking my cell phone over the next year, and it would cost $500 to replace. AT&T charges $6.99/month for insurance on the phone. Over the course of a year that's about $84. And furthermore suppose there's a 1/20 chance that I'll lose/break/etc my phone during that year. Without insurance, the expected value of the loss is $25. Unlike the $100k example, $500 isn't that big a deal to me, so the insurance is a horrible deal for me, because I'm risk neutral for a $500 loss.

Of course, real life is more complicated. Homeowner's insurance protects against risks other than fire. Risks to the insurance company can be correlated - something on the order of the 1906 SF fire is a large risk, even to an insurance company, which is why there is reinsurance. There are deductibles that change the pricing. But still, as a simple example, that's how insurance works.

Re: Micromort

#89

Post by gbog »

cdjk wrote: post #88
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.

Lottery - sure, that's a scam, barring the odd situation where a positive expected value is possible. Insurance on small events (i.e. the extended warranty from Best Buy) could be described as a scam, but homeowners insurance/car insurance isn't. The whole reason insurance exists is because of differences in risk tolerance. What is a huge risk for me, such as a fire destroying my house, is a relatively small risk for…

Yes, you describe exactly what is in Thinking Fast and Slow. So you are not rational, neither am I. But as you repeat the same patterns of risk aversion for all occurrences of a choice in your life, the sum is that you paid too much for insurance.

A rational agent would pay 100$ plus the processing fee for the home insurance. It would not pay for "piece of mind", just as it would not pay for the "excitement" of a lottery ticket.

We are not rational agent, but my point is that those who are closer to rational choice based on statistical truth are the one who win the game (in average).

Re: Micromort

#90

Post by gbog »

lucasjans wrote: post #55
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?

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 th…

Yes insurance is finance. Finance is broken, right? Maybe insurance could be too?
Post reply on HN