The Answer Is Transaction Costs When Bats Attack: Understanding Insurance
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Aug 5, 2025 Explore the quirky world of insurance and its economics, focusing on the comical 'bat-in-mouth disease' case study. Discover the intricacies of risk management, including adverse selection and moral hazard, with a humorous twist. The history of insurance dating back 5,000 years reveals its evolution and importance. Learn how transaction costs shape everyday decisions—from managing personal finances to the curious case of dogs avoiding stairs. Dive into whimsical anecdotes that bridge past and present, making complex topics accessible and entertaining.
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Insurance Pools Risk Effectively
- Insurance transfers risk from individuals to a larger pool, reducing the expected variance of outcomes.
- Many who don't suffer losses pay a fee, while those that do have their losses mitigated by the pool.
Fair Price of Insurance
- The fair price of insurance equals the expected value (probability × possible loss) plus transaction costs.
- Insurance prices must cover expected payouts and additional fees for administration and risk.
Choose Deductibles to Stay Careful
- Opt for some deductible or copayment in insurance to keep incentives for prudence.
- Higher deductibles reduce premiums and encourage careful behavior regarding small damages or claims.
