Insurance is *Technically* a Scam

When studying economics, there are certain assumptions that are made across the discipline. One of the core assumptions is that people behave rationally in making economic decisions. This isn't quite the same definition of "rational" as used normally. In economics, behaving "rationally" means that, if you do a cost/benefit analysis, people will turn down offers where the cost outweighs its benefit and vice versa.

Pictured: Sometimes, this analysis doesn't just take accounting costs into consideration, but can also use a consumer's

willingness to pay as a metric for the benefit the consumer gets from having the transaction (called "utility").

So, if you have a $2 hot dog and get $3 of utility/enjoyment from said hot dog, a rational consumer would go through the transaction.

Om nom nom nom.

You can probably guess that this assumption isn't true, just based on the the wording. People aren't rational. In the aggregate, people tend to be, allowing economists to predict trends and shape economic/fiscal policy. But this assumption is still a fiction.

If you apply the "rationality" assumption, there are two industries that should not exist at all: casinos/gambling and insurance. They operate in a strange area that normal economic understanding simply doesn't work (well, there are other theories in more advanced micro-economics that weight utility with "risk-loving" and "risk-averse" theories, but that's a bit beyond the scope of what we are doing here). Though you may think of these two sectors as being completely different, they have the same basic business model: playing the odds.

Casinos make money by offering games that are rigged. Back when organized crime ran most casinos, this was true in both the way games are structured (rules of the game) and in how they are played (cheating). Now, mega-corporations (like MGM and Caesar's) own and operate most casinos. Though the industry is highly regulated to prevent the house from cheating, the mega-corporations don't need to cheat to make gobs of money. The house edge from the way the games are structured is more than enough.

Pictured: Casinos aren't built because people win on average.

If consumers were making rational decisions, no one would go to casinos. By definition, the expected value of a bet is less than the bet itself, unless you are counting cards. But people aren't rational (and gambling is fun).

Insurance carriers similarly offer a rigged game. Instead of cards or dice, they play with human activity. Statisticians work diligently to figure out how many people, on average, will suffer a covered accident. Then, the price of insurance is adjusted to give the carrier the same kind of edge. In other words, the expected value of an insurance policy's payout over its lifetime is less than the price of the insurance. A "rational" person would never buy insurance but, again, people aren't rational.

Though insurance and casinos have the same business model, their execution is wildly different. Casinos have to build palaces to get you to come inside while insurance products are commonly required by law or contract (see, e.g. auto insurance, health insurance, rental insurance, business liability insurance, etc.). Casino/gambling ads commonly have to dedicate some space for gambling addiction services (or may be banned entirely) while insurance is commonly marketed as the "smart" thing to do.

Pictured: An example.

This is permitted because many people do not keep enough cash on hand (a/k/a liquidity) to pay for large, unforeseen expenses. But it doesn't change the business model itself. Any one policy may be net negative or net positive (just like an average casino player may be net negative or net positive) but the overall numbers don't lie.

So, if you have the ability to self-insure (or don't really need the insurance), you are better off foregoing insurance. For example, I do not have vision insurance because I have always been able to pay for glasses and eye exams out of pocket. In the long run, I will be slightly richer for it.

Insurance companies are institutionalized casinos (and have similarly built an empire off of simple math). The game you are playing is life. Place your bets wisely!