Nice write up and putting some light on something I think I have intuitively been doing but not quite realizing it. Particularly the impact on growth of wealth.
I was thinking that a big challenge for a lot of people is the estimated distribution—which is likely why so many non-technical rationales are given by many people. Trying to assess that is hard and requires a lot of information about a lot of things—something the insurance companies can do (as suggested by another comment) but probably overwhelms most people who buy insurance.
With that thought, I was wondering if anyone has thought of shifting the equations a bit. Rather than working up some estimate of the probability space, why not put an equation together that you might be able to churn out some probability distributions given W, P, d_i and c_i. for the break-even case. I think most people would be able to digest that, event x_i has implied probability p_i, event x_j has implied probability p_j. Then the person can think if those probabilities actually make sense to them and their situation.
Clearly, it could not be an exhaustive listing of events but I would think a table of three or four of the main events that carry the greatest losses would be a good starting point for most people.
Indeed. In reality, the vast majority of people do not have sufficient information to make reasonable estimates of the probability of loss—and in many cases, even the size of the loss.
Eg a landlord is required to rebuild the place and temporarily rehome the tenants while that’s being done in the event of the house being destroyed by fire or flood. They’re also liable for compensation and healthcare of affected third parties—and legal cost of determining those figures.
They can probably calculate the rebuilding cost and a reasonable upper bound on temporary housing. But third party liability?
Nice write up and putting some light on something I think I have intuitively been doing but not quite realizing it. Particularly the impact on growth of wealth.
I was thinking that a big challenge for a lot of people is the estimated distribution—which is likely why so many non-technical rationales are given by many people. Trying to assess that is hard and requires a lot of information about a lot of things—something the insurance companies can do (as suggested by another comment) but probably overwhelms most people who buy insurance.
With that thought, I was wondering if anyone has thought of shifting the equations a bit. Rather than working up some estimate of the probability space, why not put an equation together that you might be able to churn out some probability distributions given W, P, d_i and c_i. for the break-even case. I think most people would be able to digest that, event x_i has implied probability p_i, event x_j has implied probability p_j. Then the person can think if those probabilities actually make sense to them and their situation.
Clearly, it could not be an exhaustive listing of events but I would think a table of three or four of the main events that carry the greatest losses would be a good starting point for most people.
Indeed. In reality, the vast majority of people do not have sufficient information to make reasonable estimates of the probability of loss—and in many cases, even the size of the loss.
Eg a landlord is required to rebuild the place and temporarily rehome the tenants while that’s being done in the event of the house being destroyed by fire or flood. They’re also liable for compensation and healthcare of affected third parties—and legal cost of determining those figures.
They can probably calculate the rebuilding cost and a reasonable upper bound on temporary housing. But third party liability?
So, it still comes back to vibes.