Question

If only risk-adverse people will buy health insurance, why do somany people who buy health insurance also buy lottery tickets. SPeculate similarities and differences.

Answer 1

A risk-averse people doesn't like risk. For a risk-averse person the disutility of loosing money may exceed the utility of winning a similar amount, That is utility of an extra dollar of wealth , which is worth more if she has less money that the utility of an extra dollar if she has more. Lottery playing and gambling is inherently risk seeking. The games guarantee that you pay something into the system, while placing risk on the holder of the lottery and transferring risk to you. On the other side of the coin, insurance guarantees you pay some amount for a policy but it will transfer your risk to the policy writer. The human beings aren’t so great at assessing probability, and furthermore tend not to think in terms of total amounts of wealth or annual income at all, but in terms of losses and gains. Through a series of clever experiments Kahneman and Tversky showed that we are not so much risk-averse as we are loss-averse; we are actually willing to take more risk if it means that we will be able to avoid a loss.

With insurance, millions of people make monthly payments to the insurance companies, who are really investors, which use those millions of dollars worth of monthly payments as a "float" to fund their investments, just as the lottery association does. In turn, the insurance companies pays out money, in the form of claims, to people when the time comes, just as the lottery does, i.e. scratchers, promotinal events, and through tickets like PB and MM. It's just a big revolving door of money, with your small monthly payments, which allows them to make way more, which in turns allows them to pay out way more to you because of their investment strategies.

Now, the difference between these two is in gambling the chances of loss increase as gambling increases. With insurance, the chances of loss are based on activity, not on the amount of people participating in the insurance plan. So with gambling your losses correspond to how much money you bet and the number of losers correlate to how many people gamble. With insurance people are pooling their resources to replace their losses from unexpected events. In gambling you are not trying to absorb or replace losses, you’re trying to increase your wealth.with insurance you only expect a certain amount of loss to occur among a group of people. These losses vary from year to year but as the decades mount up, and as people learn about causes for their losses, the losses even out and may even decline.With gambling there is no way to stop or reduce your losses except to stop gambling. You are not sharing your losses with other people in a “risk pool”. You are simply putting your wealth out there and allowing random chance to decide if anything comes back to you.