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Comment by wpietri | Hacker News Reader

Well put. And I'd add that insurance is specifically about transferring risk from people who can't handle it to those who can. (Financial derivatives can easily be used to do it the other way.)

You could also say that gambling is net negative sum, while insurance is net positive sum. The positive part being the long-term economic benefit of people not having their lives harmed or ended by low-frequency, high-expense events.

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> insurance is specifically about transferring risk from people who can't handle it to those who can.

It is probably true for eg. real estate insurances, but there are also quite a lot of extremely overpriced insurances for all kind of products (eg. cellphone) that people certainly can afford to lose, but they are fooled by loss aversion and hyperbolic discounting.

Or they're not fooled by them. E.g. they know they'll incorrectly discount the regular savings deposits in the future, so they buy the insurance contract as a commitment device.

> I'd add that insurance is specifically about transferring risk from people who can't handle it to those who can.

Those who can, not necessarily those who will. It's not as simple an equation as "transfer the risk and you're good".

Making value judgements on transactions between consenting parties is a fraught endeavor.

And yet as voters we must make these value judgments. Gambling for many is a dangerous addiction, one with significant societal costs. You could look at the financial crash of 2007-8 as being mainly about gambling at the institutional scale.

When transactions are truly consenting (which is not the case with addicts) and have no negative externalities, sure, we should default to letting people do their thing. But when that's not true, voters, who are the real insurers of last resort for societal risks, end up having to make value judgments.

> Before the international banking crisis broke in 2007, the total face value of outstanding derivatives contracts was many times larger than the world economy itself.

Really? I had no clue that it was that bad.

It sounds bad, but it's not particularly hard to get into that position. If everyone just insures their home, the value out outstanding derivates on peoples is already 1x. Now add in everyone that has mortgage insurance that is protecting lenders on home defaults, and you're already beyond 1x for total outstanding derivatives.

I had read that about Iceland, the US mortgage sector, etc. But I had no clue that aggregate global derivatives were so huge.

Banking is the single most heavily regulated part of the economy. It is fantastic to claim the financial crisis was caused by solely private actors while dropping the governmental context.

>Banking is the single most heavily regulated part of the economy. It is fantastic to claim the financial crisis was caused by solely private actors while dropping the governmental context.

Banking might be the "most heavily regulated part of the economy", but the regulations that mattered were also disbanded one by one in the 2 decades leading to the crisis.

The government gave free reign to those "private actors".

Besides government, when it doesn't play its role as being there for all citizens interests, is just a lackey for private interests and powerful lobbies (and, no, "no government" wouldn't be a solution: just more of the problem).

Sorry, let me add it back: "The government was lobbied into allowing banks to gamble, and they shouldn't have given in to the banks." Feel better now?

"for many" is a typical overstatement.

And if I go bankrupt gambling society won't bail me out, I need to get a job.

The estimates of problem gambling are on the order of 3% of the population. I think millions of people constitute "many". YMMV.

If you go bankrupt, that is society bailing you out. We cancel your debts and let you go free of them.

We also won't let your family starve, we'll pick up a chunk of your medical coverage, and you'll be consuming all sorts of public goods without paying your share until you're back on your feet. If you ever get there, because gambling addictions that go as far as bankruptcy can be devastating personally.

Value judgements don't stop when there's consent.

And consent is not a clear, tangible thing that makes it all OK when its given.

An abused woman might justify her husband, for example, and find all kinds of excuses and say it's OK.

Also, just because someone can consent to something because it's better than the alternative, doesn't mean the deal they are given is OK. Someone on the verge of starvation might be OK with a rotten deal. We might just need to assist them and fix what caused them to starve starvation in the first place, instead of validating the "benefactor" that came up with the deal.

So who chooses for all these people who cant be trusted to make their own decisions in your world?

The same "person" who gave you and me culture, language, education, built our roads, invented our inventions, sweeps the streets, creates laws, and more. Society.

>You could also say that gambling is net negative sum, while insurance is net positive sum.

Isn't the second part of this statement false? How could insurance companies stay in business if their profits are negative? Isn't it a net negative sum for the customer base by design of the actuarial tables?

I assume they are speaking to the fact that the amount they pay out + management costs can be higher than they the amount they take in as premiums. It is because all those premiums are invested in the stock market and other vehicles which is where their profit comes from. A know of insurance companies run at -0.5% but the stock market averages up to 8% over any 20 year period.

Basically, we could all do this the same way. Take all the money you pay into insurance and invest it. When you have an incident, take it out. The only downside is if you have an incident larger than what you have invested so far. People also have set up collectives that do this as a group inside of paying others.

It's positive sum with respect to utility, not money. Because utility increases less-than-linearly with money, a 10X loss is more than ten times as bad as a loss of X. So a guaranteed loss of X is better than a 1/10 chance of a loss of 10X. It may even be better than a loss of 9X, and since the insureds are paying 10X in the aggregate, you have a margin to cover overhead.

More than that: it's an exchange of kind - compensation from individual loss is valued much more highly by the policy holder; expansion of the risk pool much more by the policy provider.

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