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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)

#301

Post by ivancho »

LorenPechtel wrote: post #277
ivancho wrote: post #274

Earlier quoted context omitted.

Ok, take 100 people, with $100 each, and have one round of $1 coin flips between each 2. A significant number of bets overall, 4950. Each person has wagered 1% of their net worth 99 times, something that we all agree sounds quite scary. And yet there will be no busted people, most will likely be between $80 and $120. Repeat this 10 times, a ridiculous amount of gambling - still most likely no bankruptcies, and the to…

It's unlikely anyone's busted but utility is unquestionably lowered. A negative for society. Insurance increases equality, gambling lowers it.

This is a bit of a stretch from what I said - 1% drop after the entire population has gambled through 10x their net worth is not meaningful. I also pointed out other speculative activities which we encourage, presumably because they compensate by growing the economy. Insurance might preserve or increase equality, but it also might extract so much rent that the overall utility is lower. There is simply no cut and dry explanation - for some parameter choices things work the way you say, and for some they don't

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

#302

Post by EVa5I7bHFq9mnYK »

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.

Number of dopamine molecules secreted by a person during his lifetime?

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

#303

Post by marssaxman »

I recall Robert Heinlein poking at this question in his book "The Moon is a Harsh Mistress"; the inhabitants of its hardscrabble lunar mining colony have no health insurance system, but they certainly do have bookies, so they place bets against their own ill-health as a means of covering medical costs.

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

#304

Post by pdonis »

adw wrote: post #96
pdonis wrote: post #58

Earlier quoted context omitted.

> Where exactly on which exact bell curve does gambling stop and insurance start? That's not the difference. The difference is that in gambling, you accept a large variance in payoff, whereas in insurance, you don't; you transfer that risk to someone else.

In gambling you pay someone to take risk for you. In insurance you pay someone to take risk for you. They are the same tool; we just give it a different name when we’re hedging from when we’re speculating.

> In gambling you pay someone to take risk for you.

No, you don't, you take the risk yourself. You're certainly not paying the casino to take risks for you; you're paying them for the privilege of you taking risks (and losing on average) by playing their games.

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

#305

Post by pdonis »

kortilla wrote: post #103
pdonis wrote: post #48

Earlier quoted context omitted.

> With insurance, you are guarantee to lose. No, you're not. There is no guarantee that your payout on a claim will be less than the value of the premiums you paid in at the time you make the claim. Averaged over all people being insured, that will be true, but you are just one person, not the average of all people. > To insure against a 10K risk, you have to pay 20K. No, to insure against a 10K risk, you pay some mu…

> No, you're not. There is no guarantee that your payout on a claim will be less than the value of the premiums you paid in at the time you make the claim. With insurance it’s very difficult to get more than the market value out of the destroyed thing on payout. Even if you ignore premiums you’re usually just breaking even. This isn’t a law but it’s something insurance companies wised up to pretty quickly because the…

> With insurance it’s very difficult to get more than the market value out of the destroyed thing on payout.

Yes, of course. But that's not what I was talking about. I was talking about whether your payout is less than the value of the premiums you have paid; it can be even if the payout is not more than the market value of the destroyed asset.

To take an extreme example, suppose you buy a house for $100,000 and insure it for that value, and the next year the house is destroyed by a covered event. Your insurance payout will be $100,000 (which will be spent in rebuilding your house), which is the market value of the house, not more, but you are certainly not going to have paid anywhere close to $100,000 in premiums, so your payout will be much more than the premiums you have paid.

Of course this situation will be very rare, but that's the point: the insurance company certainly cares about not paying out more than the market value of the asset (for the reason you give--protecting against insurance fraud), but they don't care in an individual case about not paying out more than the premiums that were paid in by that individual customer. They only care about the latter on average, and of course their actuaries get well paid to make sure their premiums are high enough to ensure that they still make money on average.

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

#306

Post by pdonis »

adw wrote: post #93
pdonis wrote: post #81

Earlier quoted context omitted.

> That is true AND it is not what you paid for. You're qubbling. You paid for replacement of the income and goods and services you can no longer provide, in the event of your death. Sure, that doesn't replace you in the eyes of your beneficiaries (assuming we're not taking the extremely cynical viewpoint about that), but of course nothing can replace you in that sense. However, if your beneficiaries are financially s…

No, the other poster is actually right. In betting on outcomes, there are two roles - bet (“long”) and lay (“short”). An insurance company is exactly a bookmaker; they are buying a bunch of risk and being paid a vig (or in the case of long-duration bets and life insurance, getting the carry) on each of those risks. This is indistinguishable from insurance, particularly when the beneficiary of insurance isn’t the subj…

> In betting on outcomes, there are two roles - bet (“long”) and lay (“short”).

I have no interest in the Humpty Dumpty principle of word usage. My point was not about the names we use for things, but about the things themselves. You can't make what has been called "gambling" in the discussion up to now the same thing as what has been called "insurance" in the discussion up to now by changing the words you use to describe them.

> You’re saying that because these are morally different

I have said nothing whatever about the relative morality of gambling vs. insurance. I have only pointed out that they are not the same thing, they are opposites--gambling is taking on risk, insurance is transferring it.

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

#307

Post by kgwgk »

AbstractH24 wrote: post #296
kgwgk wrote: post #287

Earlier quoted context omitted.

> There's nothing wrong with gambling as long as you are aware of the odds and make intelligent decisions based on them. Essentially if you’re aware of the odds and make intelligent decisions based on them there is no_____ _____ ____ gambling.

I have no idea what the ____ _____ ____ is supposed to be, but I'm guessing it is a string of negative words. And yes, thats the case. Everything in life is playing the odds.

“thing wrong with” - it was a play on the quoted sentence

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

#308

Post by JumpCrisscross »

pydry wrote: post #252
JumpCrisscross wrote: post #242

Earlier quoted context omitted.

> 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 vary…

"Utility" isnt axiomatic or analogous to holes. It's "vibes" dressed up in sciency sounding language.

What’s your opinion of game theory?

> It's "vibes" dressed up in sciency sounding language

This is pop economics. (And again, as mentioned, it’s not science-y. It’s applied mathematics. It’s only when you use the model to make predictions that it becomes science-y.)

Of course, if you’ve refuted von Neumann and Morgenstern, by all means, publish. Otherwise this is the “series of tubes” equivalent for economics.

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

#309

Post by eddd-ddde »

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…

That insurance companies are able to make a profit implies that in the aggregate, people lose money on it, just as with gambling.

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

#310

Post by EasyMark »

eddd-ddde wrote: post #309
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…

That insurance companies are able to make a profit implies that in the aggregate, people lose money on it, just as with gambling.

Not losing money so much as making money for a service (insurance). Hopefully it’s reasonable one and not exorbitant for the customer if there’s enough competition in the insurance market
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