Tuesday, May 06, 2008


Gambling on insurance

Insurance is an interesting concept: it’s gambling, as surely as is rolling dice or spinning a roulette wheel, and yet it’s an odd gamble because you’re gambling that you’re going to lose. With life insurance, you’re gambling that you’ll die sooner, and the insurance company is betting on later. With health insurance, you “win”, financially, if you become sick or injured. With travel insurance, if nothing goes wrong with your trip you’re just throwing away money.

The insurance companies, of course, just like “the house” in casino gambling, have the odds behind them, supported and adjusted by their actuarial figures. In other words, most of the time, they get your money in the long run.

But the good side is that it means that in the long run, on the average, you get to live, and your vacation goes fine.

Put that way, insurance sounds pretty stupid, doesn’t it? Well, sometimes it is, but there are good reasons for buying insurance. Two that come to mind (and there’s overlap between them) are these:

  1. The terms and your expectations are set such that your expected payout is close enough to (or even more than) your expense. In other words, you expect to “beat the odds.”
  2. The financial consequences of what you’re insuring against are sufficiently high that it’s worth it to pay a relatively small amount that you know will probably be lost, in order to protect yourself (or your dependents) against an unacceptable expense in the unlikely event.
    Well, and there’s also a third:
  3. Some external agency requires it. In the U.S. one is generally required by law to carry auto liability insurance, and mortgage lenders usually insist on homeowner’s insurance, which you pay for to protect their investment.

But then there’s one more, a psychological one. We buy insurance for “peace of mind.” We buy life and disability insurance, rather than investing the money elsewhere, because it makes us feel better to know that if we should die tomorrow, before our investments could bear fruit, our families won’t go hungry.

In the New York Times, John Tierney talks about an interesting aspect of the “peace of mind” reasoning, in which we actually believe that buying insurance offers protection beyond the financial — we believe that bad things are less likely to happen if we’ve taken the step of buying insurance:

We do, though, have abundant data regarding option C. Last year, tens of millions of people bought life insurance for scheduled flights of airlines in the United States. Not one of those insured passengers died in a crash — and this was not just a coincidence, at least not to many of the people who bought the insurance.

No, at some level they believed that their insurance helped keep the plane aloft, according to psychologists with new experimental evidence of just how weirdly superstitious people can be.

We buy insurance not just for peace of mind or to protect ourselves financially, but because we share the ancient Greeks’ instinct for appeasing the gods.

In other words, we’re superstitious, even if we keep it closeted. We know that those “extended warranty plans” that they always try to sell us when we buy electronic equipment and appliances only give huge bonuses to the retailers, and yet we think that, well, if I’m the one whose computer stops working after six months, I’ll be glad I bought it. And hey, we say, “with my luck....”

We don’t talk about misfortune, lest it be summoned, and we skip the number 13 in hotels. The cost of my homeowner’s insurance when I first bought my house came to $666, and my agent refused to charge me that, calling it bad luck for a new house. I paid $665 instead.

“It is an irony of the post-Enlightenment world,” they conclude, “that so many people who don’t believe in fate refuse to tempt it.” The psychologists first identified this reluctance last year by reconsidering a well-known superstition about lottery tickets. Experimenters had repeatedly found that once people were given a lottery ticket, they would refuse to trade it for another ticket despite being offered a cash bonus and reassured that the other ticket was just as likely to win.

That’s partly because of “anticipated regret” — that we’d feel worse for having given away a winning ticket than for not accepting the winning ticket in the first place. “A bird in the hand,” and all. But it’s also because, say the researchers, we have this nagging feeling, despite everything we know, that there’s some cosmic significance to all this.

I like to think that I don’t think that way. I do call my umbrella “the rain preventer”, but that’s just me being silly, waggish. Isn’t it? Anyway, the weather’s beautiful here today, so I think I can get the season’s first lawn-mowing done when I get home. It doesn’t look like it’ll rain.

Knock wood.


No matter what it is I order
I know there’s an avocado hidden on this plate
I don’t like them but I still eat them
I’m not tempting fate

—— Christine Lavin, “Santa Monica Pier”

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