In the world of big data today how is it possible that there are things that people know about themselves that the insurance company does not know. In some case clever researchers have been able to document specific forms of this private information such as knowing for example whether if you have a parent with the genetic disease for Huntington's Korea. There is evidence that people at risk for Huntington's Korean have much higher rates of purchasing nursing home insurance than people who do not have that gene. The idea that oh in the world ofbig data will somehow get rid of this selection problem because big brother will know everything about us turns out not quite everything.
If you knew exactly when every person was going to die, or require medical care, you could make a killing buying and selling insurance. Nobody knows these things, of course -- the future is hard to predict -- but some people know something about the future that other people don't. This sets up adverse selection: the ability of one party to leverage information another party doesn't have, in order to gain an economic advantage. Economist Amy Finkelstein is an expert in this phenomenon, as well as the usefulness of empirical studies in economic research.
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Amy Finkelstein received her Ph.D. in economics from the Massachusetts Institute of Technology. She is currently John & Jennie S. MacDonald Professor of Economics at MIT. She is the co-director and research associate of the Public Economics Program at the National Bureau of Economic Research, and the co-Scientific Director of J-PAL North America. Among her awards are a MacArthur Fellowship and the John Bates Clark Medal. Her recent book, with co-authors Liran Einav and Ray Fisman, is Risky Business: Why Insurance Markets Fail and What to Do About It.
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