Pessimism and Prudence

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Jim Lord once was asked if he was optimistic or pessimistic about Y2K. While I do not remember his exact wording, he responded that he was neither - that Y2K is not about optimism or pessimism. It's about prudence.

He then gave an example similar to the following: I have insurance for my house. Does this mean that I am a pessimist? No. Am I expecting it to burn down? No. It is a matter of prudence. The insurance is there in case it is needed.

I believe his answer was instructive. Making prudent preparations in the face of uncertainty is common sense, isn't it?

How about you? Do you have insurance against uncertainty: House insurance? Car insurance? Life insurance? Y2K insurance?

-- Rob Michaels (sonofdust@net.com), May 03, 1999

Answers

Rob,

What you're saying describes my own atttitude about Y2K quite closely. Thank you for the post.

-- Kevin (mixesmusic@worldnet.att.net), May 03, 1999.


Insurance is a wonderful deal... mostly for the insurance companies. When you actually understand the odds against a well-maintained house burning to the ground, you might feel a little reluctant about your monthly payment. (Read Andrew Tobias' book "The Invisible Bankers" if you want to learn more about the insurance industry.)

Insurance make money because they calculate the odds much like a casino. They are the "house" and, in the end, the house always wins. Ever buy "flight insurance?" A nervous purchase that transfer wealth from the consumer to the insurer. Most "insurance" ranks up there with miracle cures, beauty aids and sea monkeys.

I am a highly critical purchaser of insurance because I understand risk and statistics. Life, Y2K included, is a calculated risk. It is not prudent to prepare for every risk. It is not prudent to "overpay" in attempting to mitigate risk. If one decides to prepare, the decision ought to be based on a rational, detached analysis of the available data. The insurance salespersons, (Y2K included), want the decision to be emotional.... Remember, insurers are simply businesses who exist to make a profit.

Regards,

-- Mr. Decker (kcdecker@worldnet.att.net), May 03, 1999.


Businesses and governments are making their own contingency plans for Y2K. Why shouldn't I be doing this for my family?

-- Kevin (mixesmusic@worldnet.att.net), May 03, 1999.

http://www.y2ktimebomb.com/DSA/VP/vp9913.htm

[snip]

Life is filled with risk and surprising outcomes. That is why we pay insurance premiums to cover improbable, but not impossible surprises that can damage our health, homes, cars, and businesses. Every such situation requires a personal assessment. Should your car insurance include a collision rider? If not, you can reduce your current out-of- pocket expense. How risk averse are you?

Right now, people are attempting to assess Y2K risk.

[snip]

-- Kevin (mixesmusic@worldnet.att.net), May 03, 1999.


Mr. Decker,

Insurance exists to provide a profit for the owner/investor and also to provide a service to the consumer. I can recount times in my short life that I am happy to have had insurance. By purchasing insurance, you can limit your financial expenditures on unknown items and have a more constant cash flow situation. To limit your post-y2k expenditures/hardships, people may wish to do certain things, much like insurance, to limit their exposure. I

-- Slick (Slickoroo@hotmail.com), May 03, 1999.



the problem with insurance is we can't all file a claim at once,the FDIC is not designed to cover every bank at once,obviously that's why people who BELIEVE y2k will should pull their money out of the banks,unlike DE JAGER,my money is not THE PEOPLES,it's mine,and if the banking is so unstable that people can't demand what is theirs,then our banking is a scam and we should let it crash so we can come up with something better

-- zoobie (zoobiezoob@yahoo.com), May 03, 1999.

Mr. Decker,

Wow. What a surprise. Insurance companies are in it for the money. So what? Merely identifying insurance companies' profit motive does not automatically discredit them, nor does your ad hominem comparison with casinos.

The reason insurance companies thrive is that people are willing to give something of value -- a monthly payment -- in exchange for the value of a potential payoff in case of loss.

Moreover, I think you miss the point of Jim Lord's answer. He is not making introductory remarks for a discussion of the insurance industry. He is making an analogy to help us understand his views on preparation. Buying insurance and making prudent preparations are analogous, not perfectly parallel. Some people's rational, detached analysis of the available y2k data has led them to take precautions. Others prepare based on emotion. So what? Who cares? You say that the decision to prepare "ought" to be based on a rational, detached analysis. Really? Are you proposing some sort of ethical absolute here? How did you derive that conclusion? Perhaps you would like to reveal what set of underlying assumptions lead you to dictate what others "ought" to do, and what qualifies you to be arbiter.

-- Prometheus (fire@for.man), May 03, 1999.


-- Prometheus commented:

"Perhaps you would like to reveal what set of underlying assumptions lead you to dictate what others "ought" to do, and what qualifies you to be arbiter."

Yes Mr. Decke,r please let us ALL know what these assumptions are!!

Ray

-- Ray (ray@totacc.com), May 03, 1999.


MR. DECKER: I agree with you that the statistical probabilities lie in favor of he who provides the insurance. How could it be otherwise?

Life is indeed a risk. I would point out that those that assume risk usually do so in pursuit of that which they determine to be a reward - i.e. a value greater than the risk to be taken. You provide an excellent example:

Let us assume that you own your home and that unlike most of us, you have not asked someone to assume the risk and loan you the money to pay for it. Based on your post (and the fact that you in my example are not being required by your lender to obtain insurance) you would keep the value represented by the money you might otherwise "waste" on premiums, in exchange for your assumption of the risk of loss from rain, wind, hail, fire, etc. Said simply, you would become your own insurance company. The only difference of course is that you would have to absorb the entire loss should one occur.

Mr, Decker I have read many of your posts and you are obviously someone that tends to know what they are doing. Reality, with all the conscientous awareness of it that you will no doubt be able to bring to bear in the example I have placed you in, together with "chance" (Murphy's spiritual ally), will ultimately determine whether or not your decision to become your own insuror turns out to be a wise one. As I have previously conceeded, probability is in your favor. There would be no such thing as insurance were it otherwise.

For others, whose values are of differing priorities, they may or may not be willing to assume such risks. Insurance offers them a much more mentally restful and therfore satisfying alternative. This additional consideration, the additional values at stake, leads us to the real issue......

There is much more involved in the decision to purchase insurance than simply the premium to be paid, the coverage offered, and the probabilities involved that ultimately must favor one party or the other. In gambling, the roles of "insuror" and "insuree" are reversed. The gambler assumes the risk of loss of his "premium" in exchange for the hope of hitting the jackpot. When someone purchases insurance it is their hope that they will not "hit the jackpot", and their premium they gladly pay for the value it has purchased.

I make no value judgment on which is the better choice, only on the inherrent rationality of either or both.

-- Dave Walden (wprop@concentric.net), May 03, 1999.


First, I think the casino analogy is rather apt. Insurance companies and casinos are both in the business of providing the customer with a service... and knowing how to provide the service in such a manner to maximize profits. In both cases, there are elements of chance and risk. Casinos and insurance companies have the right to profit, but they also exist in heavily regulated industries where there is no end of industry influence on government regulators. Check how many lobbyists the insurance industry has, as compared to other sectors. What I dislike about insurance companies (and casinos) is that they attempt to sabotage the rules of the free market (and succeed more often than not).

Frankly, I do not care what you do with your money. Buy pink lawn flamingos, life insurance or insurance company stock. Most insurance policies are like the local government-sponsored lottery. The chances of "winning" are remote... particularly because the insurance industry exists in a noncompetitive market. Again, as a free economic entity, you have the right to spend your money how you wish....

My point is this, by "protecting" us, the government once again gives us the worst of possible outcomes. By sharing risk, we are encouraged to take additional risks. As the economist Steve Landsburg observed, if you want people to drive more safely, plant a spear in the middle of the steering wheel, pointed end towards driver. Most people would slow down. Increased safety measures result in an increased accident rate. (You can look it up.) I think risk (and failure) serve important purposes... they encourage prudent behavior.

Imagine how you would feel if you were required to buy Y2K "insurance." I would object on principle. As it stands, I have no objection against Ed Yourdon or the Y2K supply businesses, insofar as they do not cheat the customer outright.

I do feel all business ought to supply full information... especially insurance. Full and free information is a necessary precursor for an open market. Ask your local insurance hack to give you the raw data on the latest whole or universal life policies. And make sure you see his commission.

Regards,

-- Mr. Decker (kcdecker@worldnet.att.net), May 03, 1999.



Perhaps you could give us the name of your actuary or at least direct us to the proper Statistics package so that we too may be "highly critical" purchasers of insurance, like yourself.

Since you "are" insured, perhaps you could provide us with specific reasons why! Why you chose one area and not another to waste money. Unless of course, insurance is not a waste, like we said. Tell us Mr. Decker!

Got Life Insurance .......WHY?

Got Health Insurance .....Why?

Got Auto Insurance..... How come?

Got home owners insurance, personal /business liability, fire, flood, hurricane, indeminity, safety glass, locks on your doors, a PIN #, check protection? Why Mr. Decker?

Do you wear a seat belt...Mr Decker? Carry a spare tire in the trunk?

If you were still "Active" would you use a condom? Why Mr. Decker? There is such a slight chance of contracting AIDS or some other STD.

Maybe...just because it's a good idea? Mr Decker?

Or maybe....just maybe because it would be prudent...Mr Decker?

Risk analasis....Pshaw

While the entire world prepares...you mock us for finding sanity in an otherwise insane game of "trust the system" and insuring ourselves, against a visible and tenable possibility.

Shame on you Mr. Decker!!!

Shame on those like you!!!

Got a fire extinguisher at home or your business?

Keep aspirin in the medicine cabinet?

How come Mr. Decker?

Anyone you know taken a CPR course? Why would they do that?

Doesn't sound like a prudent thing,, to worry about these things....or is perhaps that the very reason to prepare? To be able to live within the parameters of uncertainity.

Trust your vision/guess of the future...Mr Decker?

Hardly... Your obviously a hypocrite (one who feigns virtues or qualities he does not posess) or a viper. "A prudent man prepareth..." Mr. Decker... unless of course you are more powerful than GOD and therefore correct and deserve our attention!

You're really much less "visible" when you are attacking a position rather than trying to defend one Mr Decker!!!

-- spun@lright (mikeymac@uswest.net), May 03, 1999.


Yes, Rob. Prudence is a great word to describe my reasoning for making preparations for what may come. Excellent. You da man!

BTW, Mr. Decker stated:

"I do feel all business ought to supply full information... especially insurance. Full and free information is a necessary precursor for an open market. Ask your local insurance hack to give you the raw data on the latest whole or universal life policies. And make sure you see his commission."

Thank you for touching upon the issue of information disclosure, or lack thereof. THE SINGLE EXPLANATION for why I do not engage in the often wild & wooly (sp) debate on the 'Y2K level of intensity' is lack of information from the horses' mouths.

Place Rant Here ----- So often I'm sickened by the 'I'm right & you're wrong' bickering that takes place here every day. Mind you, I refrain from reading most threads offered up by those children who've made it obvious to me they have little to give 'cept agita (read: heartburn). It's the respected regulars who are ocassionally sucked in that puts the frown on my puss. -----End Rant

Great to see RC showin' up now & again!

-- Bingo1 (howe9@pop.shentel.net), May 03, 1999.


It took a few moments, but I found an insurance agent (MikeyMac).

(laughter)

You miss the point completely. It is what economists called unintended consequences. Some bright person, like yourself, thinks... "Gosh, every car should have an airbag." The economist asks, "Why." You see, economists deal in the world of facts, provable facts. What happens when you put airbags in cars. People feel safer... and they drive more aggressively... at least in the aggregate. So, they have more accidents. One obvious consequence of airbags is to make cars more expensive. The less obvious unintended consequence... it actually lead to more accidents.

Let's take your safe sex analogy. Is the condom a perfect protection against HIV? Of course not... condoms routinely fail. But wearing a condom does reduce the risk of STDs. On the other hand, if people feel safe, they are more likely to engage in sexual behavior. The real question is... does the condom create an aggregate increase or decrease in STDs, because you have to consider behavioral changes along with the scientific data on condom failures.

The real danger is when government comes along and TELLS us we need to have a fire extinguisher in every car, a condom in every purse and wear our seatbelts. This action, like every regulatory action, has costs. To an economist, this is a question of how we should use our resources. Not what is RIGHT or what is WRONG. See a theologian for that one. The money we spend on regulating routine activities might result in costing millions of dollars per life saved.

You see, public policy is often a knee-jerk reaction to some tragedy or perceived need. Someone slips in the tub and dies, so we regulate the manufacture of tubs... even though it may only save three lives a year at a cost of millions. It may make sense to you, but only if you do not understand the real costs involved.

Let's return to the other half of my comments. Insurance companies are businesses, but they also actively influence public policy. They want everyone to be required to have insurance... so they convince nice people like yourself to pass laws requiring all sorts of insurance. Of course, large companies can self-insure... it is really the average consumer who takes a beating. Of course, an unintended consequence is to make a third party responsible for payment of claims. So we have lawyers who make a handsome living settling cases with large insurance companies because it is less expensive to settle than to litigate. We have people who defraud the insurance companies, because they think they are stealing from a big company... when they are really stealing from all of us.

Remember a simple rule... people respond to incentives. You change incentives, you change behavior... but this must be thought through very carefully. Good intentions does not necessarily make good policy.

Regards,

-- Mr. Decker (kcdecker@worldnet.att.net), May 03, 1999.


And what is the "shame on you" nonsense. I don't recall asking you to save my bacon. Be as prudent and prepared as you want, wear a crash helmet while driving to work (not a bad idea, actually). Wear body armor, drink only purified water, avoid all animal fats... but kindly refrain from restricting my personal freedoms.

Regards,

-- Mr. Decker (kcdecker@worldnet.att.net), May 03, 1999.


A couple of points:

In my lunch-hour haste to start this thread I neglected to note in the title that it was primarily intended for newbies.

Surprisingly, one thing I haven't seen much mention of on this thread is the idea of how uncertainty itself is what we are faced with, not only with Y2K, but also with so many things in life, and how this can be a motivational factor that, coupled with enough knowledge to formulate an opinion and expectations, works together to help result in prudent preparation.

-- Rob Michaels (sonofdust@net.com), May 03, 1999.



Not a newbie - but.... Uncertainty - that's what Mikeymac meant, I believe: Most of us buy insurance because of uncertainty, without doing a "risk analysis". Who knows, maybe as Mr. Decker discusses, we should. There are some types of insurance I rule out as not being worth it, but with most standard kinds I buy (house, car, disability, etc.) mostly all I do is shop around, think about not getting it, then guess I better, then write the check and forget it. The insurance companies do the risk analysis. They assign the premium dollar amounts so they'll come out ahead.

Insurance is a huge expense year in and year out! Wow if I could get back all the money I've paid into insurance for this, that, and the other thing every year I'd be sitting pretty... just had to say that -- because by comparison: Y2k preps (most people's) look pretty cheap for what you're getting. It's like buying insurance with "bonus points" - all this stuff that you'll use anyway, plus the knowledge that goes with it.

Prudence is the word. Of course, insurance salesmen do exploit our uncertainty to sell their products. So, prudence in all things is advised, including the exercise of prudence. (Pollys would argue that our fears are being exploited over nothing.) In the case of Y2k, everyone should do their own risk analysis.

If you are new to all this, the following articles can help.

Preparedness Risk Matrix

http://www.y2knewswire.com/riskmatrix.htm

Is it Rational to Prepare for Y2K?

http://sangersreview.com/ed2.htm

Mikeymac - you forgot backups for the computer!!! As for me, I back up my computer every year whether it needs it or not ;-)

-- Debbie (dbspence@usa.net), May 03, 1999.

I also thought fire insurance a complete waste of money, but it was required by the mortgage lender. The night my house caught on fire I understood why they required it. **** happens. So with Y2K. Or for that matter, Kosovo.

-- Spidey (in@jam.com), May 04, 1999.

Rob said "Surprisingly, one thing I haven't seen much mention of on this thread is the idea of how uncertainty itself is what we are faced with, not only with Y2K, but also with so many things in life, and how this can be a motivational factor that, coupled with enough knowledge to formulate an opinion and expectations, works together to help result in prudent preparation."

That's it exactly Rob!!!

I've stopped trying to pinpoint how bad Y2K will or will not be. I've stepped back from Y2K somewhat and realized that, Y2K or not, we are leaving a period of relative stability and prosperity and in all likelihood entering a new period of instability with significant potential for economic calamity.

Life is full of cycles and things seem primed to take a particularly hard turn of which, Y2K will be a factor without question. We have to take the bad with the good. The key is to not assume that good times continue indefinitely and let your guard and preps down. The preps I have completed for Y2K will be with me always now, Y2K or not.

In terms of what is prudent versus what may be extreme, that is best evaluated by each individual and family based on their own circumstances. If someone decides to leave their job, move their home to a remote location and take up a more independent lifestyle, so be it. There's nothing wrong with that. Though I think it is probably unnecessary for Y2K reasons.

Also, I question how the term self-sufficiency has been defined and whether or not it is truly achievable. Even the Amish, perhaps the epitomy of the self-sufficient lifestyle, rely on the U.S. government to a greater degree than they are willing to admit. Without our Constitution, laws, national defense and local law enforcement, they would not have the freedom to live the lifestyle they currently enjoy. And to their credit, they acknowledge their dependency on God for rain, good crops, healthy livestock, etc.

Life is full of dependencies whether or not we recognize them.

-- David (David@BankPacman.com), May 04, 1999.


David,

Nice article.

Regards,

-- Mr. Decker (kcdecker@worldnet.att.net), May 04, 1999.


Rob, thanks for the great post. My take is that prudent people are often cautious optimists.

-- Tomcat (tomcat@cat.com), May 04, 1999.

David: You wrote "Life is full of dependencies whether or not we recognize them. ".

Life is also full of choices and consequences, as we go from uncertainty to uncertainty. Experience is an expensive teacher.

-- Rob Michaels (sonfodust@net.com), May 07, 1999.


To the top for the newbies.

-- Rob Michaels (sonofdust@net.com), May 24, 1999.

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