Life, in many ways, is a carnival, a broad array of games of chance with varying stakes. The difference is that the decision whether to play some of these games– whether to undertake the risk of loss for a chance at reward– is not voluntary. Being involved in a car crash comes to mind, although the drivers and passengers did make the choice to get into a car that day. Losing property to theft or fire is another example, although owners can take preventative measures to protect against loss by those means. Contraction of a genetic disease may be a better example, as we do not have much choice of whether or to whom to be born, as far as I recall.
To deal with risk over which we believe we have less control, we spread it across a population that shares resources for the purpose of compensating those who actually suffer a loss. This is the insurance principle, the idea of pooling resources to be paid out to the subset that suffers bad outcomes. The members of the pool know that there is a chance that they will have a bad outcome, but not all of them actually will. Because they cannot know beforehand who will suffer the harm, they all pay in advance to compensate the ones who actually do, possibly themselves.
Insurance companies often advertise their services as providing the support of “a good neighbor,” the security of being “in good hands,” or the assurance of “peace of mind.” Does the purchase of an insurance policy really reduce risk, though, or does it merely trade one type of risk for another? Many people in a risk pool will never suffer the bad outcome that triggers payment, instead spending their whole lives (or whatever length of time they continue to participate) paying into the pool, in some sense, for nothing. Ex post, after the fact, all they did was give their money away to what could most kindly be described as an inefficient charity fund. Of course, no one can know ex ante, before the fact, whether he or she will suffer the harm, which is why so many people buy insurance. What is less obvious is that the decision whether to buy insurance itself carries risk.
I am resistant to the notion of living one’s life through the constant lens of economic analysis. The concept of opportunity cost, in general terms, is a valid and meaningful consideration, however, and even if we shy away from a conscious weighing of the financial costs and benefits of everything in our lives, we undertake a subconscious experiential opportunity cost analysis all the time. Despite the advances in transportation technology and our supposed ability to multitask, we can only be in one place at one time, doing (for the most part) one thing at one time. The limitations of our reality force us to make choices. The choice to do one thing necessarily forecloses other options.
Like it or not, the stability and security so many seek may be elusive in a world of opportunity costs. No matter how you toss the dice, we are all gambling men and women, constantly betting on one alternative over another with the choices we make. Even in an area ostensibly about security and comfort– insurance– both sides are gambling: policyholders are betting that they will suffer the insured-against harm, and the issuers are betting that they won’t.
Some readers may find themselves dismissive of this account, unsurprised about and cognizant of the risky nature of the world. With every rambling step through life another wager made with imperfect information, though, is it better to press on, attempting to gain a complete set of information; surrender to the flow, in full acknowledgement of the unattainability of omniscience; or take some middle or alternate path?
Robert Hunter, Jerry Garcia & Bill Kreutzmann, Deal, Garcia (Jan. 1972).
How are you holding your cards?