Insure me

For those of you not familiar with Tim Harford, he's an economics writer for the Financial Times. He also hosts a show on BBC2 and he pops up on the e-zine Slate occasionally. I discovered him through a wonderful book he wrote -- The Undercover Economist. It's one of those "pop econ" books (a la Freakonomics) that attempts to explain everyday economic puzzles. There are lots of similar books out there, but Harford's is the best I've read. Anyway, I found this (sort of) recent rant of his and I thought I'd pass along some of his insights.

The fundamental lesson is that most (small $) insurance policies are a ripoff. This is one of my soapbox issues -- not as big an issue as the lottery, but a bigger deal than the idiocy of the Electoral College. Yeah, I know we all feel better "just in case," but it's almost always a bad deal. I'll let Tim explain:

Most of us worry too much about little risks like losing a cheap mobile phone.
[...]
What is more, most of the people who buy the phone insurance could afford to replace a £50 phone without having to starve.

We are buying protection from a risk that we can afford to take, and we are buying it at an incredibly high price.

Though I can't find a source, I've heard an obscene share of Best Buy (and similar retailers) profits come from those extended warranties. Similarly, I saw a report (can't find it either) a couple of years ago showing the USPS charges something like 10 times the "fair price" for postal insurance.

Let me be clear, I'm not talking about insuring your home against fire -- an unlikely event, but one with a huge negative financial impact on most of us.

It can make sense to pay for insurance, even overpriced insurance, to protect yourself from a big risk: your house burning down, or you becoming ill and unable to work for years.

For that kind of risk, there is no way your savings account will ever be big enough.

But that is what insurance is designed for: risks that you cannot afford to take, not risks that you can.

If you can bring yourself to keep cool about little risks, you should insure only the big risks, such as your house burning down.

(What counts as a big risk, of course, depends on how rich you are.)

As for the mobile phone in the lavatory, you will simply have to tell yourself that in the big scheme of things, it is not that important.

That is the closest that economics will ever come to Taoism.

I had to include that part, just so I could get "economics and Taoism" into the same sentence. Regardless, stop automatically buying product protection "just in case" something happens. As Mr. Harford points out, insurance is for big risks that you can't reasonablyaffordt to bear on your own.

Anyway, that's my PSA for the day. So far no calls about the bathroom today. Oh, it turned out I did NOT have to go pick out fixtures last night. Builder Bob had a prior commitment so now we're back to the "just pick something out" plan.