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Micromort

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Re: Micromort

#91

Post by gbog »

eli wrote: post #87
gbog wrote: post #44

Earlier quoted context omitted.

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.

The car accident is different, insurance is mandatory because you also risk other people's lives.

And I don't say you shouldn't pay for your own protection, I say you can't evaluate the risk correctly and are very likely to be ready to pay too much. Which is how insurance make money.

Re: Micromort

#92

Post by gbog »

bodyfour wrote: post #78
batiudrami wrote: post #35

Earlier quoted context omitted.

Insurance isn't a scam. You pay a little extra to ensure that you can get the money before you would have saved it (assuming you put your entire ensurance premium into savings) in the event that you (or your family, in the case of life insurance) need it. Sure, in infinite (or sufficiently high) number of lives/events, you'll always end up behind, but that doesn't mean it's a scam.

Agreed. It is true, though, that many people fall into the trap of over-insuring. For example, people who could easily afford to replace their car yet pay for comprehensive insurance. For risks you can self-insure against, you should do so. Otherwise you're just gambling against actuaries, and they're better at the game than you. For catastrophic events, insurance is a completely sensible bargain for both parties.

Catastrophic event; reminds me of black swans. The more catastrophic, the rarer, but also well be the one with the most damage. As every insurance is itself insured, I'd say if there is something really catastrophic, all crashes and no-one gets money at all.

Financial insurance also build a corset to let the card castel grow higher, until it falls apart on the floor. Idea taken from Antifragile.

Re: Micromort

#93

Post by dragonwriter »

eli wrote: post #30
jlgreco wrote: post #29

Earlier quoted context omitted.

You are assuming a linear relationship between alcohol and risk of death. There is absolutely no reason to think that.

What would you propose instead? Isn't it obvious that alcohol can cause certain fatal diseases in proportion to consumption?

> Isn't it obvious that alcohol can cause certain fatal diseases in proportion to consumption?

Its obvious that consumption is positively correlated to certain fatal conditions, but its not at all obvious that the risk is in proportion to (i.e., linearly correlated with) total lifetime consumption.

That's simply not the way things work.

Re: Micromort

#94

Post by gbog »

olalonde wrote: post #80
gbog wrote: post #44

Earlier quoted context omitted.

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…

"fair insurance", "There should be not one penny left ", "Lottery pleasure is empty"... You are stating a lot of opinions but not many facts. Also, why isn't it "fair" for insurance companies to turn a profit while it's fine for other types of businesses?

You can have a look in a book titled Thinking Fast and Slow. It is strongly backed by multiple experiences. Profit: it is ok to make profit, but where ifs the limit? Would you agree that companies should not take advantage of children weaknesses to force sell them useless thing (a lot do)? Or mentally deficient ones? I wouldn't, because somehow we are not in a jungle. And the point is that humans are not grown ups in front of rare events. Everyone fears an earthquake during the week following an earthquake, and completely forget about it the next month.

Moreover the fact that insurance are highly regulated just makes my point. We are defenseless and the law puts some limits because a scam is too easy to build.

Re: Micromort

#95

Post by cdjk »

gbog wrote: post #89
cdjk wrote: post #88

Earlier quoted context omitted.

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 lot…

Uh, no. Risk aversion is rational. It seems like you're equating rationality with risk neutral preferences, which I, and a lot of other people disagree with.

Besides, it's all about risk preference. As long as my preferences are consistent and transitive, I think it's safe to say they are rational. Take the fire insurance example. Suppose I have a job that pays $10k/year. I would gladly pay $200/year to avoid the possibility of a $100k loss. Those are my preferences, and as long as you can't a non-transitive loop, it's perfectly rational of me to have those preferences. In this case, I'd value the guaranteed loss of $100 to be a much better outcome than the risk of loss of $100k.

In short, rational != risk neutral.

Re: Micromort

#97

Post by actuary »

gbog wrote: post #85
actuary wrote: post #84

Earlier quoted context omitted.

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.

Like any other product you buy, there is a reasonably transparent and competitive market for personal insurance.

Unlike any other product you buy, the price of insurance may not be excessive, inadequate, or unfairly discriminatory. This is the law. Unlike any other product you buy, personal insurance prices must be filed with regulators who have the power to block the sale of any insurance product that does harm to the public. Unlike any other product you buy, an entire profession is devoted to the pricing of insurance. You cannot even propose to sell an insurance policy if your pricing scheme has not been signed off on by a credentialed actuary. Those credentials are not easy to come by, and actuaries are bound by standards of practice that preclude us from doing anything unethical.

If my employer asked me to violate an actuarial standard of practice, I would quit on the spot, and I don't know any other actuary who wouldn't do the same. And finding an actuary willing to throw away their livelihood would only be the first step in the process of attempting to charge a consumer an excessive rate. There are so many safeguards in place that bypassing them all doesn't seem like it would even be possible, and even if it were, the insurer would not reap any rewards due to the force of adverse selection.

I don't often post on HN, and I know that the actuarial profession is not very well known, but arguing with an actuary about the pricing of insurance is like arguing with a heart surgeon about where the aorta is. I can tell you with the authority of an expert that you are mistaken.

Re: Micromort

#98

Post by csomar »

aaron695 wrote: post #54
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.

Agreed, and the fact people here think insurance is not a scam is actually proving your point how they can't measure risks well even when pointed out to them. If you house burns down, sure that's reasonably catastrophically bad, But if you house burns down, there's a fair chance it'll happen at night, and there's is a fair chance you'll die. Don't spend money on insurance, spend it on stopping your house burning down…

I can't understand your logic.

1. Securing the house from fire costs $5,000/year to reduce the probability of the house catching fire (it's still possible that it catches fire).

2. Buying an insurance which costs $500/year and will replace your home in the event that it catches fire.

2 is cheaper, and a better deal if your house catches fire. With 2 you are even more secure.

Re: Micromort

#99

Post by sien »

ColinWright wrote: post #64
sien wrote: post #63

The Micromort concept is explored thoroughly and very enjoyable in the book 'The Normal Chronicles' by David Blastland and Michael Spiegelhalter. It's well worth checking out. Blastland was one of the creators of the excellent 'More or Less' on the BBC that looks at how numbers are used and mostly abused by the media, politicians and everyone else. Spiegelhalter is a prof of stats. The book addresses a number of the…

Er, it's David Spiegelhalter. He's a friend/colleague of mine. While on the subject, "More or Less" is quite a good program, and fun to participate in.

Ha, Sorry, thanks for that.

Say hello to David/Michael, he does a great job!

Re: Micromort

#100

Post by gbog »

cdjk wrote: post #95
gbog wrote: post #89

Earlier quoted context omitted.

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 lot…

Uh, no. Risk aversion is rational. It seems like you're equating rationality with risk neutral preferences, which I, and a lot of other people disagree with. Besides, it's all about risk preference. As long as my preferences are consistent and transitive, I think it's safe to say they are rational. Take the fire insurance example. Suppose I have a job that pays $10k/year. I would gladly pay $200/year to avoid the pos…

Except if your entire wealth is at stake, being risk adverse is not rational. That is the whole point of Thinking Fast and Slow.

Proof is easy: I give you the choice to play on the flip of a coin, one side you win $1200 other side you loose $1000. You'll likely refuse because of fear of loss. Then consider I propose the bet 1000 times in a year, under different disguise so you don't recognize it. You lost 200 000!

It is not rational to refuse a net positive bet it of irrational fear of loss. It is even more obvious for the lottery, because we would all agree that paying lottery ticket is irrational, right?

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