The Law of Large Numbers and Insurance

2min Snip

00:00

Play full episode

Summary

Transcript

Episode notes

The idea is to spread risk right I mean when you buy the insurance you're not buying it from your friend you're buying it from much larger company who can live through the fluctuations up and down. Right so even if I'm not the kind of person who literally goes to the gym by the fact that I would want to be a member of the gym this I'm talking about friends of mine not myself but that's a hint that correlates with other healthy behaviors. Exactly again the idea is you take you know a hundred people or a million people each of whom has you know a one in ten chance of losing that hundred dollars and you spread that risk around only one at you know the law of

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.

Support Mindscape on Patreon.

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.

See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.