When Bats Attack: Understanding Insurance

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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:

• Kenneth Arrow on the Uncertainty & Welfare Economics of Medical Care
• Anja Shortland on Kidnap: Inside the Ransom Business

"Piano player in a brothel" story origins:

• https://www.goodreads.com/quotes/93559-my-choice-early-in-life-was-either-to-be-a
• https://barrypopik.com/blog/dont_tell_my_mother_im_a_banker_she_thinks_i_play_piano_in_a_whorehouse

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 [email protected] !

You can follow Mike Munger on Twitter at @mungowitz