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Mike Munger explores insurance economics through the lens of transaction costs and risk management, culminating in an amusing case study about "bat-in-mouth disease."
- Insurance transfers risk from individuals to larger pools, reducing the expected variance of outcomes
- The fair price of insurance equals expected value (probability × potential loss) plus transaction costs
- Information asymmetry, subjective risk valuation, and strategic behavior complicate insurance markets
- Insurance faces two major challenges: adverse selection (who buys insurance) and moral hazard (behavior changes after getting insurance)
- Deductibles and co-pays help align incentives between insurers and insured
- Insurance history dates back 5,000 years to ancient China, Mesopotamia, Greece, and Rome
- The "bat-in-mouth disease" case study shows what happens when someone tries to purchase insurance after an incident
- Transaction costs explain why dogs sometimes stop climbing stairs and why freezing credit cards--ie, transaction costs--might prevent impulse spending. The piano player in a brothel story, and its history.
- The book o'da'month is Daniel Flynn, The Man Who Invented Conservatism.
Bat in mouth story: https://www.nbcnews.com/news/us-news/bat-flies-womans-mouth-arizona-costing-nearly-21000-medical-bills-rcna222463
Some background on insurance:
"Piano player in a brothel" story origins:
Daniel Flynn book: The Man Who Invented Conservatism
If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !
You can follow Mike Munger on Twitter at @mungowitz
