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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)

#321

Post by adw »

pdonis wrote: post #306
adw wrote: post #93

Earlier quoted context omitted.

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 des…

Both are transferring risk. If I insure against political risk, is that any different from betting on the presidential election? No, it isn’t. The distinction between insurance and gambling is cultural, they’re both just risk swaps.

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

#322

Post by adw »

pdonis wrote: post #304
adw wrote: post #96

Earlier quoted context omitted.

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.

You’re paying them to take the higher variance end of a swap. That is exactly the same transaction as insurance, complete with the same pricing model.

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

#323

Post by doubloon »

kortilla wrote: post #104
doubloon wrote: post #100

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…

> how often does the house lose? Not often, but it does. See AIG

AIG got bailed out by the government and is still in business.

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

#326

Post by bluecalm »

ivancho wrote: post #301
LorenPechtel wrote: post #277

Earlier quoted context omitted.

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…

I think you are simply wrong about your assumptions. If the system is semi-stable the total utility won't decrease that much. If it's not stable it will. I am not sure exactly what you are missing there but maybe that it's expected utility going down, not utility going down with every outcome. For example if people with 80 and 120 net worth flip a coin for 20 it might be go up or it might go down but u(60) + u(140) < 2x u(100). Maybe that's why you utility model predicts the total utility collapsing quickly while in fact it predicts slow utility decrease (if the whole setup is close to being stable).

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

#327

Post by bluecalm »

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.

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

The argument is simply incorrect. Insurance companies provide a service, not +EV (money wise) investment. Same as any other service companies - they make profit, the customers benefit.

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

#328

Post by ivancho »

bluecalm wrote: post #326
ivancho wrote: post #301

Earlier quoted context omitted.

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…

I think you are simply wrong about your assumptions. If the system is semi-stable the total utility won't decrease that much. If it's not stable it will. I am not sure exactly what you are missing there but maybe that it's expected utility going down, not utility going down with every outcome. For example if people with 80 and 120 net worth flip a coin for 20 it might be go up or it might go down but u(60) + u(140) <…

My model was not to demonstrate that utility doesn't go down ever, it was to show that it can do that extremely slowly, which makes the utility argument about why we discourage it societally a bit weak - we're clearly not very good at discouraging any other behaviors resulting in long-term bad outcomes (for society or the planet), and we reward all sorts of risk-taking.

I think the simpler explanation is that gambling is seen as addictive and destructive on an individual level, and there is no need for total utility to explain why that's undesirable

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