| Posted by: tedm at June 15, 2001, 9:32 am | | Topic: Help me out here... Forum: Winner Online |
The point about insurance is this. Normally people tend to be risk-averse. They will tend to pay some premium to avoid the chance that they might incur a catastrophic loss even if the chance that such a loss might occur is ery slim. The insurance companies spread out this risk over many policyholders. Indeed, they function much like casinos in the sense that they will have to pay out some policyholders but they will generally make a profit.
The paradox comes when people are risk-seekers. This means they pay a premium to ASSUME risk as opposed to AVOIDING risk. Since most casino games are negative expectation, and there are many many gamblers, this is a paradox that has confused a lot of economists.
Regardless of expected monetary loss, if your satisfaction from gambling exceeds this loss then you will tend to gamble. Same principle holds if you pay to go see a movie.
Actually I am straying way off topic but these were some of the principles I was alluding to.
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