Article gives a good background, but doesn't clearly answer it's own question. The simple answer (although not followed as closely as it should be in regulation):
Gambling involves the creation of risk where none previously existed, while insurance is solely about the transfer of risk from one party to another (or more than one).
Driving a motorcycle also involves the creation of risk where none previously existed. But people seem to make a rational choice to get on their motorcycle.
The risk of losing money gambling to me seems less relevant than the risk of getting addicted to gambling and making irrational decisions. There's a 100% chance that when I buy a BMW that I'll lose money, but of course no one believes there's a problem with car addicts that the government needs to solve. There is, however, a real problem of gambling addicts, not too different from heroin addicts.
That said, solving the problem with prohibition creates the normal prohibition problems (rational adult gamblers lose their rights, black markets are setup, etc). I tend to like the self banning programs that many states have set up. If you feel you are addicted, you can sign a form banning yourself from casinos for a period of time / life. If you go back, you can be arrested for trespassing.
And of course, the governments do-gooder motivations seem suspect when the government makes lotteries illegal, but then sets up their own lottery monopoly with absurdly low payout rates.
>Driving a motorcycle also involves the creation of risk where none previously existed. But people seem to make a rational choice to get on their motorcycle.
That's because there are concrete benefits from doing so (going from one place to another). And even with that, there are all sorts of regulations for getting a license to drive a motorcycle, where and how to drive one, what to wear while riding one (a helmet is mandatory in many countries), etc. And even so, if motorcycle related accidents where that many that it would matter, driving one would have been outlawed altogether probably.
>There's a 100% chance that when I buy a BMW that I'll lose money
Yeah, but you also get a BMW. With gambling you on average just get nothing.
Gambling is entertainment, the same as going to see a movie or listening to music. You don't get anything in return other than what you experience going through it. I agree that comparing it to buying a physical product may not be the best metaphor, but I can understand where it's coming from.
In the end, it becomes a problem when it's no longer entertaining (just a game), but rather pathological.
The house edge on well-played blackjack is only a few percent, and the highest-payout slot machines are similar. Which means that a low-limit player can keep their losses down to a few dollars pretty easily. So stingy gambling is actually pretty similar to music and movies in dollars-per-hour terms.
I've certainly seen movies bad enough that I would have happily spent my money playing dollar blackjack instead.
Right, and a lot of people forget that when comps are thrown in the edge is whittled down even more, if it exists at all. If I went to a bar I'd be ordering drinks, maybe paying a cover charge, but instead I get "free" drinks while I gamble.
Craps is also a very low (<1%) house edge, and it's a more social and exciting game compared to blackjack (to me atleast)
> Craps is also a very low (<1%) house edge, and it's a more social and exciting game compared to blackjack (to me at least)
This is an even better example. I didn't cite it because I couldn't remember the edge on good play, but it's a solidly social experience which can be had for a very reasonable price.
I think he means that he gets the pleasure of having/using a BMW compared to a gambler who also gets the pleasure of gambling. Both are forms of entertainment and both cause you to lose money.
Gambling certainly gets you status - walk around Vegas and check out the businesspeople playing together. Or for a non-casino version, read about people playing Liar's Poker on Wall Street (in, aptly, Liar's Poker).
And on a smaller scale, it gets you enjoyment. I've had some fun times playing low-minimum blackjack, chatting to other players and the dealer. It got me "nothing at all", but in the same sense that a concert or the markup on drinks at a bar gets you "nothing at all".
Ok, but I'm not a gambling addict, and most people who gamble don't become addicts.
I know people who are literally homeless because they'd rather spend their money following bands around. Some of those bands are too niche to be "socially valuable". Does that mean we need to equate music with heroin, too?
The existence of addicts, or the lack of a social movement or physical product, does not determine whether something is worthwhile. Applying your standard would cut out everything up to "going for a walk in the woods", unless by socially valuable you just mean "things I find aesthetic".
Some people enjoy playing games and think they are good enough to wager money for it. It's not unreasonable for people to go to Vegas or Atlantic City with a disposable cash budget of how much they can gamble away. You just factor it into the cost of the vacation. It's entertainment, losing sucks but it's always fun to win even if you are still down from what you started with.
For some people, luxury cars are a waste of money. Everyone has their own priorities on what is important to spend their money on. Some people like expensive cars and spend their money on it. Some people just want something that won't break down and can get them to work so they can spend their money on whatever hobby they really like.
"no one believes there's a problem with car addicts that the government needs to solve"
If you drive almost any highway in Germany, you'll see a great number of (goverment-funded) posters against speeding. If you commit enough driving offences, you may need to pass so-called "medical-psychological examination" (MPU - "Medizinisch-Psychologische Untersuchung") which is dubbed "idiocy test". This will cost you time, money and dignity. There are also campaigns agains short-distance driving etc.
So I think what you say is not true, quite many people believe that there is a real and present problem with car addicts that the goverment needs to solve.
isn't that a different addiction from what the parent post is about??? the parent post is about 'buying car' addiction, while your 'addiction' is about bad driving stuff
but of course no one believes there's a problem with car addicts that the government needs to solve. There is, however, a real problem of gambling addicts, not too different from heroin addicts.
Not necessarily disagreeing, but it raises the specter of double sided moral hazard: what about people who buy houses near flood plains and either don't insure or under insure them because they expect emergency relief government funds to rebuild and thereby recoup their loss at public expense? What about young people for whom health insurance premiums are uncomfortably high, so they instead show up at the emergency room and don't pay? What about parents who do not purchase life insurance and if one dies, the othe goes on public assistance? I realize this may be a US centric issue.
A motorcycle or car is a fungible asset, and it's the use of the asset that's enjoyable. Gambling is not. It's effectively a service.
Buy a Harley/BMW, and come to regret it? You can sell it, and claw back at least part of your mistake. (and if you bought it Used in the first place, that sidesteps most of the depreciation argument)
Blow your paycheque gambling? You have no recourse.
I know that your mention of "car addicts" was just a throw-away example, but that is actually a strikingly apt metaphor for America's unhealthy dependence on the automobile.
I'd say the fundamental difference is that gambling sometimes provides a huge payout after a small loss, whereas insurance provides a payout roughly equal to the loss.
Insurance isn't supposed to have big paydays, it's just supposed to make you whole. Your house insurance might pay out a million dollars, but only if that's what it actually costs to rebuild your house.
It's telling that when insurance starts to get away from this model, like people insuring stuff for far more than it's worth, or taking out life insurance policies on strangers, both the law and morality start to frown it.
I think I would refine that a bit as, insurance [1] involves payout on an event the insured doesn't want to happen [even given the payout], while a gamble is where the insured does want it to happen [because of the payout].
This matches the historical and in-practice role of the insurer: they try to keep you from overinsuring things, or insuring things you don't have an interest in preventing from happening ("insurable interest"). Both of these create a so-called "moral hazard", the same category that make gambling bad, and vastly increases the fraud they have to deal with.
[1] or rather "the kinds of risk transfer we want to allow" vs those we don't
That's easy to get around. I don't want Duke to win the NCAA Tournament. I will pay you $X to insure against that happening, but if it does, my insurance policy kicks in to the tune of $Y.
You mean easy to get around if that's what the law actually said? Sure, the distinguisher I gave doesn't easily translate into cheaply applicable test that law enforcement can use; it's more for identifying categories of activities that look more like gambling vs insurance so that lawmakers can identify which are worth banning. It's hard to externally identify that on individual cases.
With that said, given appropriate modifications, your example could legitimately be called insurance. If
- There were a quantifiable decline in prestige from the loss (per sibling comment), and
- the payout were low enough that the insurer thought that you'd still prefer winning to loss+payout, and
- this were a common enough thing
Then yes, it would look a lot more like insurance and merit being regulated like that and less like gambling.
Here's an interesting and topical example: the "billion dollar bracket" challenges you're seeing right now with the NCAA Tournament are all insured. The company offering the "prize" isn't going to be out $1B if someone hits a perfect bracket; they've got insurance to cover the event that someone wins. (The cost of that insurance is rumored to be around $10M.)
Those challenges are all free, though you could get really deep and argue that consumers are paying incremental value for providing email addresses and marketing leads to the customer.
The fundamental difference is that gambling is an added risk (generally, and the exceptions are often illegal even where gambling is legal otherwise [0]), where insurance is a hedge against an existing risk; both decrease your expected financial return, but gambling also increases risk while insurance decreases it.
[0] e.g., someone formally attached to a team in a sport and having a financial interest in their performance also betting against the team as a hedge.
Insurance can also make existing risks more acceptable and thus lead to more risky behaviour. E.g. if someone has 0$ co-pay/deductible for car crashes they might not drive as carefully because who cares, it won't cost me anything right? (well until they jack up premiums). So crafting insurance policies and rates takes a lot of care, but the profit motive is a strong driver here.
> Insurance can also make existing risks more acceptable and thus lead to more risky behaviour.
Arguably, that's the entire point of insurance: mitigating the risk of the insured activity so that it is more acceptable as a choice (because unmanaged risk can make an activity less acceptable than average expected net benefit would suggest.)
But the premiums are tied to the size of the loss, which is what the payout is supposed to cover.
The loss you're supposed to be covering is your lost income and other less tangible but quantifiable benefits to your family. Although I'm no expert, I'm guessing underwriting becomes more difficult for policies that are completely out-of-line with your income. There has to be some justification for the payout to meet underwriting standards, which in essence is considering the size of the loss. If you're asking for a policy that is very unusual, it will be much more expensive, if you can get one at all.
gambling sometimes provides a huge payout after a small
loss, whereas insurance provides a payout roughly equal
to the loss. Insurance isn't supposed to have big
paydays, it's just supposed to make you whole.
Not at all! You're conflating "loss" with "payout" in your insurance example. My homeowners insurance might pay me a million dollars ("payout"), but I only pay $5k/yr ("loss") for the policy.
To compare apples-to-apples, gambling sometimes provides a huge payout ("winnings") after a small loss ("bet"), whereas insurance sometimes provides a payout ("winnings") in the event of a loss in return for insurance payments/deductible ("bet").
I place a $5k bet that has a $1M payout. I win, and I'm up $995k. I don't take the bet, and I don't make anything. That's a $995k net ($995k - $0).
I buy a $5k insurance policy against my $1M home. It burns down, and I'm only out $5k (the cost of the policy). I don't buy the policy, it still burns down, and now I'm out $1M. My net is still $995k ([-$5k] - [-$1M]).
The "lose your bet" / "buy insurance but your house doesn't burn down" scenarios are the same either way (-$5k).
I'm arguing that the fundamental difference between gambling and insurance is the presence of a large loss that's necessarily linked to the large gain.
By only looking at the net benefit, you're arbitrarily ignoring that. Of course if you ignore the thing that makes them different, they look the same.
Large is a nonspecific value, as is the valuation of the loss.
Is the $1000 life insurance policy large? The limit is practically somewhere around the lifetime administrative costs or we would see even smaller (like you do in non US countries). I don't know the smallest insurance limit in rupees, but it's tiny.
If I knick a priceless artifact (e.g. baseball card), the loss is practically nothing, but socio-economically noticeable via devaluation.
"Professional" gamblers treat gambling as trading time (looking for opportunity, like in Poker) versus risk. Bad gamblers (e.g. slot, roulette, etc) play out games where there is no possible benefit from time investment. No consistent reward for trading any commodity.
There's no difference between many kinds of gambling and insurance, other than the regulations and mediums involved. The insurance companies are still managing risk vs reward.
The difference is whether or not this scenario can happen: you put in some money, get out much more than you put in, and end up far better off than you were before.
With insurance, only the first two parts can happen. The third part can't happen, because the second part only happens to compensate you for a loss. When gambling, all three can happen. Of course, on average it won't, but it's possible to put in a dollar and get out a million dollars with no losses besides the dollar and a little bit of time.
It is sometimes possible to arrange all three with constructs we call "insurance," like taking out a life insurance policy on someone you don't like, but my argument is that this is where we start to see insurance as "wrong" too.
I don't think public opinion is formed on how payouts are based, but on a more general view of social harm.
It's pretty hard to lose your car/house/job to an insurance addiction. Your risk differences are part of an underlying mechanism that results in this outcome.
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.
> 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.
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.
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).
> 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.
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.
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.
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.
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.
both gambling and insurance are slightly-negative-expectation plays with occasional large payoffs. With gambling the payoff is random, but with insurance the payoff is coupled predictably to an external negative event.
I see it this way: insurance is risk sharing. Gambling is competition. Insurance is about risks to yourself and your property. In betting, you are not compensated for your own loss, but some event that may be a loss or a gain or even neutral. I'd say taking out an insurance against a random person's life would still be betting.
Taking out insurance on a random person's life is also illegal.
I worked in insurance. I am not a fan of it. But you need insurable interest in someone to take out life insurance on them. Otherwise, people would just insure random strangers and then kill them.
This is not hypothetical. One of the forms of insurable interest is key employee life insurance. There have been cases where a business decided to call entry level employees "key employees" so as to take out life insurance, and then these "key employees" kept dying." There have also been historical cases where female serial killers were offing relatives for the insurance money.
"both gambling and insurance are slightly-negative-expectation plays with occasional large payoffs"
When you take in account that personal utility functions aren't linear, insurance and gambling are no longer slightly-negative-expectation, but usually positive.
In other words, if U() is your utility function, U($1M) != 1MU($1). For most people, U($1M) > 1MU($1) and U(-$1M) < 1M*U(-$1).
I don't think that's true in the general case. For example, one penny has virtually no utility to me on its own, but there's plenty I can do with one pound, getting more than a hundred times the value from it.
I don't think that's quite what people usually mean when they talk about diminishing marginal utility. Granted, "marginal" was missing from the parent comment, but I gather that was the phenomenon being discussed.
Diminishing marginal utility implies that you gain more utility by acquiring your first penny than you do acquiring your hundredth. Now, at such small levels of money, you could certainly argue that almost nothing is for sale at 1 penny, but once you get above the level where the disutility of carrying around a coin is dwarfed by the utility of the money itself, diminishing marginal utility applies pretty well.
Things may get weird at the scale of pennies or billions of dollars, but at scales relevant for buying insurance or gambling diminishing marginal utility certainly holds.
Losing $10k when you have $20k hurts less than losing $10k when you have $10k.
No, I'm suggesting that it isn't linear, and different people have different functions, even at the same level of wealth.
There are even some techniques to discover and plot your own utility curve, which is quite useful when you're handling things like investing and insurance.
For example:
* Would you give $1 for a 10% chance of receiving $10?
* Would you give $1 for a 9% chance of receiving $10?
* Would you give $10,000 for a 1% chance of receiving $1M?
* Would you give $10,000 for a 0.9% chance of receiving $1M?
* Would you receive $10 for a 1% chance of losing $1000?
* Would you receive $10,000 for a 1% chance of losing $1M?
* Would you rather do nothing or have a 50%/50% chance of winning $1000 and losing $1000?
* Would you rather do nothing or have a 50%/50% chance of winning $1M and losing $1M?
It's the other way around, "any risk is bad" and "marginal utility is decreasing" are conclusions that you reach from your own function, not that drive your function.
* Would you give $1 for a 1% chance of winning $100?
* Would you give $1 for a 1.1% chance of winning $100?
* Would you give $1 for a 1.2% chance of winning $100?
.
.
.
* Would you give $1 for a 10% chance of winning $100?
Yes, gambling for small wins can be negative, if you don't include the "excitement" or "entertainment" in the utility function.
But then you're not talking about a pure monetary transaction. More like a trade. Which goes back to your point: nobody makes a voluntary transaction where they get less value than they provide.
Take charity donations, for example: people value the warm feeling from helping others and a clear consciousness more than the money they are giving.
You have to get through a few steps to agree though! You could disagree by saying that people's "revealed preferences" are their "actual preferences", or by saying that people's utility function after accounting for hyperbolic discounting is their "actual utility function."
Of course in the case of heroin addiction it's easy to poke fun at the notion of time-discounted utility functions, but you can't really shrug off the idea, since it's vital to explaining why people do all sorts of immediately neutral or unpleasant things like brushing their teeth, saving money, or exercising.
Not quite: one of the usual characteristics of insurance is the existence of an insurable interest[1]: you must personally have exposure to the risk before you can take out insurance against it. So insurance is really changing a large occasional negative payoff into a smaller more consistent one.
More accurately, insurance isn't about a 'payoff' it's about being made whole after a covered loss. You don't profit from insurance payoffs. Insurance is designed to mitigate risk as opposed to profiting from it.
Insurance is defensive while gambling is offensive.
Your statement clearly states the essential distinction.
A more concrete way of stating this is: the purpose of gambling is to try to earn an outsized return, while the purpose of insurance is to make you whole in case of loss.
There are further benefits to insurance once it gets more advanced. Actuaries, along with experts studying the domain being insured, find an appropriate price for insuring various different options (ex: living by the shoreline vs however many meters inland) which provides a sort of regulation. It gives consumers a well informed number for any given risk. Even more advanced, they'll start to research new ways to make the activity safer. See: Insurance Institute for Highway Safety.
Granted, gambling does give you betting markets which may help predict the future as well. But I would guess for broader topics only. Perhaps someone could enlighten me otherwise.
It's still a risk. If everyone's houses burn down at once the insurance company will be SOL unless they insured themselves against catastrophes (which they probably do).
Also, arguing by definition is pointless, put since we're already debating pointless semantics, google 'risk transfer' and see what comes up.
The cost is the risk. Many people will pay more into insurance than they get out of it (that's obviously a mathematical inevitability), so those people viewed in isolation would be better off self-insuring. Of course, no one knows ahead of time if they're the ones who will be healthy.
Im talking about the insurance companies. They dont take any risks, since they know in advance how many accidents that will happen. To them it is just a forseeable cost.
The risk of each client is not transferred, but eliminated.
That's simply not true. They work very hard to understand and control the risks they take. But there is an entire field of reinsurance[1], which is insurance for insurance companies against the times they get it wrong, such as major disasters. And even then I suspect you'd find a big enough disaster would break the reinsurance companies too.
Which is why reinsurance companies take out so called "super cat" (super catastrophe) insurance. Some of the world's bigger super cat insurers are Berkshire Hathaway subsidiaries; National Indemnity is probably the best known one.
No. Insurance is to pay for an outcome that the insured did not want. A person with car insurance does not want to get into an accident. A person with health insurance does not want to get sick. A person with home insurance does not want their house to get flooded.
A gambler, on the other hand, is indifferent to the outcome of the roulette wheel except for the monetary payout. Same goes for buying options unless there is ownership of the underlying security.
A gambler had an incentive to cheat to make the transaction go their way. An insurer has an incentive to help make the event the insured does not want to happen not happen.
Another way to put it is that the lack of insurance in its turn is indeed gambling. You are imposing a risk onto yourself in order to achieve cash gains, while you could walk away without the risk but with less reward.
Gambling involves the creation of risk where none previously existed, while insurance is solely about the transfer of risk from one party to another (or more than one).