Gambling & Insurance Are Unfair Bets (Insurance #1) Transcript

Transcript (PDF)

Insurance companies would like you to believe that gambling and insurance are totally different. But this is nonsense. Both are equally bets. You can bet that you’ll hit the jackpot, or that the Lakers win tonight’s game. You can equally well bet that your car will be stolen, or that you’ll soon be dead.

Let’s examine the structure of a bet. A bet involves two parties: the bettor and the house. And three ingredients: a payment from the bettor to the house; an event; and a payout from the house to the bettor if the event occurs.

In gambling, the bettor might be called a player; the house — a casino; the payment — a stake; the event — something like “bettor hits the jackpot”; and the payout — winnings. To enter the bet, the player first pays the casino the stake. And if the event then occurs, he receives the winnings.

In insurance, the bettor might be called an insuree; the house — an insurer; the payment — an insurance premium; the event — something like “bettor’s car is stolen”; and the payout — a benefit. To enter the bet, the insuree first pays the insurer the insurance premium. And if the event then occurs, he receives the benefit.

Once we look past the jargon, we see that both gambling and insurance share the exact same structure that make up a bet. And so, both are equally bets.

There is a further similarity. Both are unfair bets that are rigged in favor of the house.

Say for example the payment’s $1. And the event — be it hitting the jackpot or having your car stolen — has a one-in-a-thousand chance of occurring. If the bet were fair, the payout should be $1,000. But of course, it won’t be fair and the payout will be less than $1,000. Nothing surprising here. After all, if the payout were fair, casinos and insurance companies wouldn’t be able to turn a profit.

So, gambling and insurance have two fundamental similarities. Both are bets. Moreover, both are unfair bets.

In the next video, we’ll look at the one fundamental difference between gambling and insurance. It involves something called risk.