231–240 of 328 posts
I think the main difference is: In gambling, you want the payout. In insurance, you probably don’t. Why? Because you don’t want that bad thing to trigger it (illness, property damage, death).
Earlier quoted context omitted.
A simpler way of explaining it is that both activities have a negative expected value but insurance usually reduces variance while gambling increases it. In the context of money variance is usually synonymous with instability and unpredictability. Those things are bad and it’s worth paying a fairly priced premium to avoid them. In simple math terms gambling is essentially the opposite dynamic. Of course things that a…
But why is reducing variance desirable? It's exactly because there is utility of money function which is concave. Variance being undesirable comes from the shape of utility of money function.
Think of it in terms of life. Once you are dead you’re dead, it’s the end. If the variance in your life outcomes “crosses the zero line” then the game ends, even if it’s just for an hour.
You could bend your argument to cover that by arguing that the utility of that last little fraction tends to infinity. Like what would you exchange for the drink of water that would save your life if you were minutes from death?
But it’s a bit strained, especially as a way to explain it to someone for whom utility is not already intuitive.
I think it’s pretty easy to understand that excessive variance leads to death or very negative outcomes.
All you need to demonstrate it is a houseplant and a supply of water, air, and sunshine. If you increase the variance of any of those three things sufficiently you quickly don’t have a houseplant any more, regardless of the average total supply.
I feel the article as well as most of the comments miss the most important difference between the two. Insurance, assuming the fee isn't too high, increases your utility of money while gambling decrease it. If there is an event that happens 1 time in 100 that costs you $100k and you pay $1.05k to insure against that would have a negative expected value in money terms but positive expected value in utility of money te…
> This decreases combined utility of you and your counter-party. The counterparty tends to have an edge. Roulettes have zeros, bookies get a cut, etc. I guess on a poker table everyone thinks that they have an edge but they can't all be right.
Earlier quoted context omitted.
A simpler way of explaining it is that both activities have a negative expected value but insurance usually reduces variance while gambling increases it. In the context of money variance is usually synonymous with instability and unpredictability. Those things are bad and it’s worth paying a fairly priced premium to avoid them. In simple math terms gambling is essentially the opposite dynamic. Of course things that a…
Variance can be good though. Imagine you want some expensive service like a waterline for your house that's difficult to steal but you live under rules of gangsters or oppressive government so holding anything more than a little money at a time is risky. You gamble every paycheck knowing eventually you will get a big payout. You quickly pay for the waterline and now you don't have to walk 300 ft to the well everyday.
Earlier quoted context omitted.
> This decreases combined utility of you and your counter-party. The counterparty tends to have an edge. Roulettes have zeros, bookies get a cut, etc. I guess on a poker table everyone thinks that they have an edge but they can't all be right.
Also casinos typically take rakes in poker
agree, this is definitely describing something that is little talked about but very central to economics. there is a book by the Gangs of New York author called Sucker's Progress: An Informal History of Gambling in America (1938). The relation between insurance and gambling used to be even more blurry. Even the terminology. The word "Policy" for example. https://en.wikipedia.org/wiki/Numbers_game Even the mathematica…
That’s why the house has actuaries and analysts to tell them that their bets in Florida are too highly correlated to each other, and they have risk of bankruptcy. So they leave the state. Similarly, I imagine we’ll see tests of insurance companies’ risk analysis when California has a significant earthquake.
Earlier quoted context omitted.
> This decreases combined utility of you and your counter-party. The counterparty tends to have an edge. Roulettes have zeros, bookies get a cut, etc. I guess on a poker table everyone thinks that they have an edge but they can't all be right.
The edge you have from selling insurance is selling psychological safety, people pay to not feel negative. Maybe some gamblers can recognise moments they've been irritated where some rule requires insurance, "let me embrace the risk on my own dammit"
That kind of edge is just having a good or service someone would pay for.
I feel the article as well as most of the comments miss the most important difference between the two. Insurance, assuming the fee isn't too high, increases your utility of money while gambling decrease it. If there is an event that happens 1 time in 100 that costs you $100k and you pay $1.05k to insure against that would have a negative expected value in money terms but positive expected value in utility of money te…
This is the reason I always play the lottery. I won't miss $2 a week or whatever, but I will notice if I win an 8+ figure payout.
Earlier quoted context omitted.
Variance can be good though. Imagine you want some expensive service like a waterline for your house that's difficult to steal but you live under rules of gangsters or oppressive government so holding anything more than a little money at a time is risky. You gamble every paycheck knowing eventually you will get a big payout. You quickly pay for the waterline and now you don't have to walk 300 ft to the well everyday.
That's a very contrived scenario and your hypothetical response is very unrealistic. For one thing, the gangsters either wait outside the gambling joint or simply take it outright and farm the rake. For another, real communities with such dynamics don't accumulate cash, they might accumulate tangible goods or a little infrastructure but they are not going to have large sums of cash-equivalents lying around. For all k…
In the Philippines they even have a pooling system 'paluwagan' like this to make it possible for people to buy big things without a bank account or having to store large sums for large period of time which can be risky there.