Wednesday, 15 August 2012

Insurance, Probability and a Moral Dilemma

Last year I had a salesperson from Sky+ phone my house, enquiring whether I wanted to insure my SkyBox for the next 3 years for £190. What I am now going to say is roughly what I said to the salesperson.  When people buy Sky+ Boxes, DVD players, Hi-Fi systems, washing machines, fridges, and things of that nature, it seems fairly obvious that they shouldn't pay an additional fee to get the product insured against damage or malfunction.  I assumed this was commonly realised - but apparently not, because out of curiosity I spoke with a cashier at Hughes to enquire what percentage of people opt for supplementary insurance, and found that it was usually over 50% of buyers.  That surprised me, because I doubt that 50 out of every 100 people regularly set fire to 5% of their wages.

The reason you shouldn't opt for non-compulsory insurance is more or less the same reason you shouldn't set fire to 5% of your wages - the odds are that at some point you're going to find better things to do with your money.  Say you buy a DVD player for £100; you probably will be offered a 3 year insurance plan for an extra £29.99.  If you buy a washing machine for £400, you probably will be offered a 5 year insurance plan for an extra £150.  Expressed like that, particularly by an effusive salesperson, it can seem tempting.  But it would be madness to take him up on his offer.  You are being offered a certain expenditure of £150 for an outside chance that yours is one of the very few washing machines that will be damaged or malfunction.  Having to replace your washing machine means a very slim chance of paying for another product outright.  Having a washing machine with no insurance means a very good chance of having £150 to spend on something else. With these probabilities, it is certainly worth the risk, and foolish to be so circumspect in risk-aversion. 

This is where probability will hold you in good stead; the probability of your being one of the unlucky customers whose product goes wrong is astronomically dwarfed by the probability that you'll be one of the huge majority whose product depreciates within the natural timescale.  Therefore, don't be fooled by the conviction of the salesperson - he (or she) is probably well aware that the offer is designed to extract more money for the company from credulous consumers who think they're getting a good deal.

What I've just said was brought to mind by a philosophy paper I just read that contained an interesting moral dilemma, the author of which I won't disclose, for reasons that will now become clear. I'm interested to know what your answer would be to this dilemma, before I disclose the philosopher's answer.  That's why I will re-write it using a slightly different variation, to avoid people looking for the answer on Google.  Here is my version of the dilemma:

500 million people are about to experience a quite discomforting but not too serious earache for the next hour.  However if one innocent person is killed the 500 million won't have to go through with the earache for an hour. Should we kill the innocent person or let the 500 million people go through with the earache?

What would your answer be?  As a hint, the issue of optional insurance might be an indicator.  You can post your answer here, or PM me on Facebook - and I will reveal the philosopher's rather interesting conclusion in my next blog.