Insurance is very different from a prediction market. There are competitive aspects, but the wager is between a professional oddsmaker and a consumer. Price (aka probability) discovery in insurance is performed by experts, not by buyers of the insurance.
So, from certain cynical perspective, that it is okay for a professional to bet against laymen and make lots of money in the process (and perhaps use a part of that for lobbying), but it would be highly irresponsible to let two laymen bet against each other.
Less cynically speaking, insurance mostly creates stability, other forms of betting mostly create instability. If the professional makes a wrong decision and loses a lot of money—either he can take the cost because he made a lot of money from other bets, or he goes bankrupt.
The layman’s losses from a wrong bet against the professional are limited to monthly payments of an insurance that was worthless in the first place. But that cost is known in advance, and most insurance contracts can be cancelled when you realize you are running out of money.
Laymen betting against each other often comes with an attitude “I believe that I am right, therefore I do not think much about the consequences of being wrong… oops, now my family can’t eat because I lost my entire salary”. Negative externalities for everyone around.
Perhaps we could make a safe version of a prediction market by not letting idiots bet (by somehow credentialing the players e.g. based on their income) but that would mean losing a lot of fuel that was supposed to power the market.
I have no clue what “it is okay” means, so I can’t comment on that framing. From a legal (in most places) and from a common social-approval perspective, gambling is never good, but is an acceptable vice when it’s taxed and controlled at scale, or so small as to be unnoticeable.
Insurance bypasses this by framing it as “shared risk”, and generally prevents insuring things for significantly more than the loss those things bring. It’s not a free, arbitrary wager, it’s a very restricted and controlled wager that can be explained as making an adverse (to the buyer) event somewhat less painful.
In any case, the key insight behind prediction markets is crowdsourcing of probability beliefs (aka price discovery). This is a thing that insurance markets do not do. Thus, the question is answered (“because they are not comparable things”).
Insurance markets also effectively redistribute wealth from the financially illiterate (people who buy financial products such as endowment life insurance) towards insurance salesmen and owners of the insurance companies.
But this pattern-matches “customers buying products from companies”, which is a context where it is normal that the money goes from the customers to the companies, so no one objects.
But more importantly to the reasons people actually buy insurance, they redistribute comparatively small amounts from the (most people) lucky to pay large amounts to the (few) unlucky. Which, behind the veil of ignorance, you would want, to ensure (insure) that your life is not ruined by bad luck.
Insurance is very different from a prediction market. There are competitive aspects, but the wager is between a professional oddsmaker and a consumer. Price (aka probability) discovery in insurance is performed by experts, not by buyers of the insurance.
So, from certain cynical perspective, that it is okay for a professional to bet against laymen and make lots of money in the process (and perhaps use a part of that for lobbying), but it would be highly irresponsible to let two laymen bet against each other.
Less cynically speaking, insurance mostly creates stability, other forms of betting mostly create instability. If the professional makes a wrong decision and loses a lot of money—either he can take the cost because he made a lot of money from other bets, or he goes bankrupt.
The layman’s losses from a wrong bet against the professional are limited to monthly payments of an insurance that was worthless in the first place. But that cost is known in advance, and most insurance contracts can be cancelled when you realize you are running out of money.
Laymen betting against each other often comes with an attitude “I believe that I am right, therefore I do not think much about the consequences of being wrong… oops, now my family can’t eat because I lost my entire salary”. Negative externalities for everyone around.
Perhaps we could make a safe version of a prediction market by not letting idiots bet (by somehow credentialing the players e.g. based on their income) but that would mean losing a lot of fuel that was supposed to power the market.
I have no clue what “it is okay” means, so I can’t comment on that framing. From a legal (in most places) and from a common social-approval perspective, gambling is never good, but is an acceptable vice when it’s taxed and controlled at scale, or so small as to be unnoticeable.
Insurance bypasses this by framing it as “shared risk”, and generally prevents insuring things for significantly more than the loss those things bring. It’s not a free, arbitrary wager, it’s a very restricted and controlled wager that can be explained as making an adverse (to the buyer) event somewhat less painful.
In any case, the key insight behind prediction markets is crowdsourcing of probability beliefs (aka price discovery). This is a thing that insurance markets do not do. Thus, the question is answered (“because they are not comparable things”).
Prediction markets, if they ever become popularized, would practically be redistributing wealth from the below average to the above average.
So it’s a critical disadvantage compared to insurance markets.
But that’s also why it sounds so highly appealing.
i.e. Trying to collectively outsmart the bottom sounds like it has better prospects than trying to outsmart the top.
Insurance markets also effectively redistribute wealth from the financially illiterate (people who buy financial products such as endowment life insurance) towards insurance salesmen and owners of the insurance companies.
But this pattern-matches “customers buying products from companies”, which is a context where it is normal that the money goes from the customers to the companies, so no one objects.
But more importantly to the reasons people actually buy insurance, they redistribute comparatively small amounts from the (most people) lucky to pay large amounts to the (few) unlucky. Which, behind the veil of ignorance, you would want, to ensure (insure) that your life is not ruined by bad luck.