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What makes gambling wrong but insurance right? (2017)

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Re: What makes gambling wrong but insurance right? (2017)

#241

Post by JumpCrisscross »

bluecalm wrote: post #168

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…

> insurance is a service worth paying for as long as the fee is lower than utility you gain from it

Critically, the variable that makes gambling rational is the hedonistic pleasure one derives from it.

Insurance versus gambling seems like a penetrating question, but as you describe, it really is not. The more-germane one is gambling versus drinking or theme parks or mindless television.

Re: What makes gambling wrong but insurance right? (2017)

#242

Post by JumpCrisscross »

pydry wrote: post #218
graemep wrote: post #196

Earlier quoted context omitted.

Utility is quite a complex and badly defined concept - its also central to economics. The idea is that the value to you of an extra amount of money goes down as you have more. i.e. getting £10k could be life changing for a poor person, unnoticeable to a rich one. https://moneyterms.co.uk/utility/ The expected value is the amount multiplied by the chance of getting it. SO if you have a 50% chance of getting £1,000 the…

Ive never seen a definition of utility which wasn't self referencing. It's a highly unscientific concept.

> never seen a definition of utility which wasn't self referencing

It’s analogous to “holes” in semiconductors or virtual particles. You can’t directly observe it. But it’s an intuitive notion that makes many calculations easier.

Critically, there are several valid definitions of utility, e.g. the von Neumann–Morgenstern (VNM) utility theorem [1] and revealed preference [2]. Each has its own axioms, defined with varying rigour, that can be theoretically extended and practically applied.

> a highly unscientific concept

Sure, it’s unscientific in the way mathematics are unscientific: it starts with a set of axioms and extends from that. Determining whether the chosen axioms fit a particular situation is a separate, more scientific question.

That said, similar criticisms have been raised about e.g. auction theory and quantum physics, both of which (like utility-based models) make testable predictions.

[1] https://en.m.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenst...

[2] https://en.m.wikipedia.org/wiki/Revealed_preference

Re: What makes gambling wrong but insurance right? (2017)

#243

Post by mewpmewp2 »

wigster wrote: post #211

it seems obvious to me... one is a guard against losing stuff you have the other is a short cut to riches you don't

Also life is full of gambles. Not buying insurance is also a gamble and a statement of gambling. You are betting that the undesirable doesn't happen, and avoiding to pay the insurance.

Driving a car is a gamble and a bet that an accident won't happen.

Re: What makes gambling wrong but insurance right? (2017)

#244

Post by pfannkuchen »

bluecalm wrote: post #168

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…

Isn’t this typically explained via marginal utility, not just utility? You can’t really compare the utility of the same amount of money in the hands of different people, but for a single person each additional unit of money is worth less than the last along some non-linear curve. The $1k you spend on insurance is further along this curve than the first $1k of the insured loss (and the second, and the third, etc) and if you do the naive expected value calculation it ignores this curve.

Re: What makes gambling wrong but insurance right? (2017)

#245

Post by jprete »

beaeglebeachedd wrote: post #240
jprete wrote: post #234

Earlier quoted context omitted.

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…

Informal gambling between low tier non gangster class people outside a joint is common amongst the lower class most everywhere and the whole scenario was about minimizing liquid wealth and dealing with cash intensive problems in places where cash is risky. 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…

Thanks for the example.

Re: What makes gambling wrong but insurance right? (2017)

#246

Post by derf_ »

bluecalm wrote: post #205
Narkov wrote: post #188

Earlier quoted context omitted.

> With this in mind insurance is a service worth paying for as long as the fee is lower than utility you gain from it. Insurance is invariably a "for profit" enterprise so the utility or return across all participants has to be lower than the value invested/paid. Clearly you are protecting an unlikely situation so the utility value of peace of mind would need to be quantified. Gambling has utility too...entertainment…

>>Insurance is invariably a "for profit" enterprise so the utility or return across all participants has to be lower than the value invested/paid. This is wrong and the reason you are confused about the argument. If insurance is priced fairly all parties benefit utility wise. It's true that the buyer has negative expected value money wise and the seller positive one but as the utility function is concave both parties…

> It's true that the buyer has negative expected value money wise and the seller positive one...

This is obviously the insurer's goal, but in practice competition and relaxing underwriting standards to win business means that many insurance companies do not turn an underwriting profit (the buyer winds up with a positive expected value). But premiums are paid up front and payouts to policy holders do not occur until later, and the insurer can invest the "float" in the meantime, so they still make money.

Obviously the customer could have taken the premiums and invested them themselves, but that also takes time and effort, and may come with risk itself. It is not obvious that insurance is a bad deal even ignoring arguments about the concave nature of the utility of money.

Re: What makes gambling wrong but insurance right? (2017)

#247

Post by bluecalm »

skizm wrote: post #229
bluecalm wrote: post #168

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.

2$ per week for a few years is a day off work or a few stake dinners. You could definitely notice it if you wanted.

Re: What makes gambling wrong but insurance right? (2017)

#248

Post by mewpmewp2 »

snotrockets wrote: post #130

Fun fact: in the US, you can actually buy an insurance against a specific event that had already happened when you took the insurance (the term to google is “title insurance”)

It would be good to clarify that it is a generally unknown issue or an unknown event that might have happened in the past, but discovery of this still happens in the future.

Re: What makes gambling wrong but insurance right? (2017)

#249

Post by mcculley »

scott_w wrote: post #174
efitz wrote: post #164

Earlier quoted context omitted.

And that is one of the reasons why medical insurance is so crazy in the United States nowadays - it’s no longer used to hedge catastrophic unpredictable events (which used to be called “major medical”), but instead is used to pay for normal, minor consumption or for chronic conditions. In other words it’s no longer like a bet, it’s like a discount plan. But the problem is that the complexity of introducing a third pa…

> But the problem is that the complexity of introducing a third party payer who doesn’t want to pay, and a consumer who has no incentive to self regulate consumption, means that the costs spiral up and up. The first part is correct but a consumer that “doesn't self regulate consumption” is not a thing in medicine. People don’t take drugs for fun. People don’t injure themselves more in public healthcare systems. In fa…

People eating more than they should, getting diabetes, and then consuming more medical services is a form of poor regulation of consumption.

The overapplication of OxyContin is another form of unregulated consumption.

Now we have the semaglutides and will see the same effect.

Re: What makes gambling wrong but insurance right? (2017)

#250

Post by leashless »

pdonis wrote: post #59
leashless wrote: post #38

In insurance you expect to come out ahead in the average case. In gambling you expect to come out behind in the average case. Therefore insurance is rational and gambling is irrational.

> In insurance you expect to come out ahead in the average case. Not financially, no. On average people who buy insurance receive less in payouts than they pay in in premiums. If that were not the case, nobody would sell insurance because anyone who tried to would go bankrupt. If you factor in the non-financial benefit of risk avoidance, then yes, people who buy insurance come out ahead--but now not just in the avera…

Oh I meant from the perspective of the one selling the insurance, not the person buying it.
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