The Frustration of Insurance Markets

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The idea of insurance by itself is not a scam. It is true that the insurance company is going to make money. If everything goes well, you will be spending more money than you get back on average but it is worth it because of this lower risk and higher certainty. One of the reasons insurance looks so bad and gets such a bad rap is because it often is high priced with waiting periods and deductibles.

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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