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Overcoming Bias Commenter's avatar

People don't get fired for small loses, but they do get fired for big losses.

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Overcoming Bias Commenter's avatar

If a person is reasonably wealthy, it is generally the cases that ONLY catastrophe insurance is a good purchase, in the sense that on the aggragate, the insurance buyer loses in terms of expected value (otherwise insurers would go broke) and the only rational reason to buy insurance is protection from losses that are catastrophic.

It makes much more sense to buy house insurance than car insurance. Buying laptop insurance for instance is ridiculous (except if are a few standard deviations above the norm in terms of recklessness and the insurance covers it even if you drop it). I don't have the data buy I'd bet that many electronics retailers and car rental companies derive a significant part of their income from insurance, because their margins are so high.

I've just seen the movie "Contagion", which is about epidemics, and the idea came to mind that drug companies can fund their research by selling the optionality of buying not-yet approved drugs when they do get approved, so you pay a small insurance premium to guarantee that you are first in line if there is a shortage of medicine of some kind. In other words, a good way to fund the protection of tail risks is to take money from people who worry about tail-risks and not have to convince people who ignore them that they should be worried and pay.

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