But as I understand the OP, this runs counter to the basis of the argument. The premise is that you know you will never collect on your insurance (assume you get this information by magic). The question is whether you still derive benefits from having an insurance policy.
At this point, I’ll confess that I don’t understand the OP any longer. I very likely misinterpreted what I heard my friend say.
But, yeah… It sounds like he’s saying, “So, if I live to be ninety-five years old, and I never collect any settlements from the insurance company, then what the heck was I paying all those premiums for all this time, eh?”
And, if that turns out to be the case, then, sure, it seems silly in hindsight. Look at the Cold War. We spent all that money on ICBMs, and for what? Never used the damn things. Silly waste of money, right? But this only works in hindsight (or, as you suggest, if one has a magical foreknowledge.)
Everybody else in this thread has set me straight by pointing out that you have to multiply by the probability of needing to make an insurance claim. You can only assess the likelihood of an accident or injury. You can never know for sure what’s going to happen.
This, I think (?) is the fallacy he had in mind. Yes, there is a probability that my premiums are all wasted money. (That’s the greater likelihood, since the insurance company aims to make a profit.) But I might get lucky :dubious: and break my leg.
I think you have it. That’s why insurance is paid up front. If you knew ahead of time the probability of an event is 0 or near-zero, you don’t buy insurance for it. Not many earthquake policies are sold in New York after all. Your friends fallacy is confusing the value of the policy after the term with the value at the beginning of the term.
See Heinlein’s Lifeline for a take on this very question.
Would your friend agree that a person who risks their capital on an entrepreneurial exercise deserves no reward unless that risk comes to fruition?
Ooh, good one! Studies have shown that the discount rate for losses and gains are different, but they are still fundamentally similar.
He might say, “It isn’t worth anything until it’s come to fruition.” Or, don’t count the chickens till they’re hatched. Dunno.
Investing in a future project is certainly risky, but people do it all the time. And they swap around and buy and sell shares in such projects, so those shares have value. It depends on how they calculate the probability of success.
I made my argument in a post above. But here’s an analogy. You could argue that paying property taxes to support your local school district served you no purpose if you don’t have children (we’ll assume you were raised and educated in a different district). But the counter-argument would be that you benefit from a good school system even if you don’t send any of your own children to it because you live in a town with better-educated people as a result.
But…but…but…that’s socialism!
Would any Ayn Randite agree to that reasoning?
(I consider it entirely valid. I have no objection to paying for schools, even though I don’t have kids, and certainly never will. An educated society is good for the overall society, and it’s good for me, individually, because it means youngsters will be looking for jobs and keeping the economy strong.)
I think this represents a cost-benefit calculation. One might consider the benefit of good schools to them less than the cost in taxes. In the insurance example, the benefit is pretty clearly higher than the cost - assuming it happens. The probability of the benefit is what happens.
Here is a good way of testing this. Ask your friend to imagine he has invested $10,000 in a venture with a 10% chance or returning $1,000,000, and a 90% chance of going bust. Assuming no major life issues from losing the $10K, this is a great investment. Now, ask him if he would sell the rights to the investment to you for $1,000. If he truly believes it is not worth anything, he should jump at the chance. If not, ask him how much he would sell them for. Any rational person would say $100K, assuming the conditions I set are true.
If he truly believes an investment is worthless until it comes to fruition, he’d probably never invest in anything.
Actually it’s not. It is socializing risk, but the combination of being a) voluntary and b) a profitable business model makes it ok.
Would an Ayn Rand follower be at all comfortable with the logic of “Let’s benefit everyone, because that will benefit me?” Maybe I’m selling the breed short, but it seems that they’d prefer a more targeted approach, favoring policies that “benefit me without wasting extra resources benefiting other people too.”
If “rational self interest” is the key philosophy, then socialism is good. It helps everybody, and I’m part of everybody. But wasn’t Ayn Rand death and hell on socialism?
Is the reasoning that socialism benefits everyone, but only a little, whereas totally focused self-interest is more likely to benefit me only, but a lot?
Yikes! This is getting down into “lottery” or “dam bursting” math. For me, the 90% is too close to “certainty” for comfort. Yes, if a roulette wheel offered a 50 to 1 payoff for rolling double-zero, it would be rational and wise to put money there. But you’d have to do it a lot of times before you really started to see the benefits.
(This is why I’m willing to drive on the freeways. Every day, I take a 100,000 to 1 risk of severe injury or death. That’s close enough to zero for my comfort.)
I’m out of my depth here, and am not sure what his answer would be. My answer is that such an investment is too scary. I’d take it if it were the other way around: 90% of returning $111,111 and 10% chance of going flat bust.
I’d also take it if I could break it up into 1,000 smaller chunks, each one having a 10% chance of returning $1,000 and a 90% chance of going bust. (Ah, so long as they’re all independent, that is!)
But this is an entirely different issue, having to do with pyschological perception of numbers and probabilities.
I can’t speak for objectivists, but I suspect they’d find the benefits of public schools much lower than the rest of us, and consider the government involvement a cost. I think a reason conservatives in general are so down on schools is to decrease the perceived benefits to people, which would make it less likely for them to vote for school bonds and the like. I don’t think even objectivists object to things which benefit others - they probably think private businesses can do it better than government. And they discount social benefits.
You get fairly major benefits from driving, so the cost benefit analysis is pretty good. So what you are doing is rational. On the other hand, the person who refuses to wear a seat belt isn’t rational, since the benefits are pretty small given the risk.
People aren’t very good at judging small probabilities. Individually most people wouldn’t pay extra for air bags because the chance of injury is so low - they think. But summing over everyone they make sense, which is why it is good for the government to require them.
Oh it has everything to do with it, and is an example of how the expected utility curve is nonlinear. If you had a million bucks in the bank, you’d probably take it because losing $10K is no big deal. If you had $10K in the bank you’d never take it. Splitting it up moves each bet to a different place on the curve.
VCs make this kind of bet all the time, on much worse odds.
Thaler and others did experiments on how much money people would want to delay a reward. Say you’ll get $1,000 now - but if you wait a year you could get more. How much would you want for this delay? When you do this you can see the individual discount rate - basically the interest people would require to delay the reward. Clearly the rational response is more or less what you could get if you invested that money. But the measured discount rates are much higher, and change dramatically depending on the delay time and the amount of money.
Anyhow, your reaction to this is pretty much standard. I mentioned that the $10K must not be critical, but most people can’t get past that.
No, that wasn’t the problem. I accepted the premise that I had to have enough so that the 10K was an acceptable risk.
My problem was the psychological over-assessment of “90%.” My mind just sees that as “too close to certain.” I know it’s not. (If nothing else, I’ve been a role-playing-gamer for forty years. I’ve rolled my fair share of dice, and gotten a handful of 1-in-100 rolls. Just this weekend I got a 1-in-216 roll. Of course the damn thing was a fumble…)
I’m also the sort of person for whom prices are always $7.99 instead of $8.00 even. I certainly know better, but, damn, the illusion is strong of that being more than just one cent cheaper.
As Terry Pratchett says, million to one shots happen nine times out of ten. I use quote in my class. 90% mapping to 100% is pretty much the same as 1% going to 0. We’re terrible at extreme probabilities, which is why lots of fiction works.