My best guess is that most insurance is bought not to reduce risk but instead to signal prudence and caring. The first life insurance companies had a terrible time selling "bets on their death," and only succeded when they framed insurance as what a caring and prudent husband and father did to take care of his family. While simple adverse-selection theories predict that high risk folks buy the most insurance, in fact low risk folks buy more insurance. And we don’t want to insure our big life risks because such a desire would signal a lack of confidence in our prospects.
Actually I always saw life insurance advertised as protection for the insured. Yet, of course, its protection for the survivors.
My assumption, however, was that people were using insurance as a talisman. I.E., if I would actually benefit financially from my spouse’s death than surely it won’t happen, because nothing ever happens to benefit me financially.
Sadly, I think most hedging is based on this principle.
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Tuesday ~ September 15th, 2009 at 9:51 pm
teageegeepea
Have you ever played “Day of the Tentacle”? Hoagie claims that washing his car causes it to rain, so he never washes it. At some point he needs lightning to strike Ben Franklin’s kite, so he washes a carriage.
But anyway, isn’t it often the insured person themselves who is buying life insurance? You don’t financially benefit from your own death (unless you fake it!).
Tuesday ~ September 15th, 2009 at 11:52 pm
chrismealy
Can somebody decode the libertarian econ blogger obsession with signaling? It’s some lame attempt to preserve homo economicus, right? They can’t believe that people are nice, so they render them diabolically nice.
Wednesday ~ September 16th, 2009 at 11:38 am
TGGP
More an ev-psych thing. Geoffrey Miller makes it quite clear he’s a liberal and his last book was all about signalling. Libertarians are probably more likely than the general populace to accept not only evolution but also sociobiology, though founders of that field like Trivers & E. O. Wilson are hardly libertarians either.
Wednesday ~ September 16th, 2009 at 12:25 am
Rick Russell
I have to wonder if the author ever bought life insurance.
Insurance really has two purposes: (1) to cover debts if the event of your death and (2) to give your family some breathing room. For example, my wife would be stuck raising an autistic 7-year-old and a 1-year-old by herself with no income in the event of my death.
Wednesday ~ September 16th, 2009 at 11:10 pm
Andrew
Which is why it is correctly called life assurance – you cannot insure a life.
I tend to look on it as an attempt to try to ensure that your genetic legacy (your children) have a good chance of a decent survival to adulthood.