Re:When Is Insurance Worth It?
by taneq on Friday December 20, 2024 @11:22PM
(#42477537)
Insurance isn’t about maximising overall outcome (we know it doesn’t do that!) It’s about managing critical (often existential) risks. You buy insurance when you need to protect against an unrecoverable loss (house burned down, car was stolen, permanently injured and unable to work, etc.) that you can’t just “ride out” and self-finance.
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> (we know it doesn’t do that!)
...but it does do that under the assumption of compounding, and that's part of why it exists. I recommend learning about the Kelly criterion and E log X strategies to see why.
The key insight is we shouldn't look at the arithmetic expectation of profits of isolated bets beccause that causes us to overinvest in uncertain profits and underinvest in insurance.