A Strike on Insurance

A Stike on Heads!

In keeping with my writing bretheren, I am continuing my strike. Not my strike on writing however; just my strike on good writing.

So, remember how I got an iPhone? Well, I gave that one away. But then later, I actually got another iPhone, even though I still love that T-mobile HotSpot @ Home thing. I can ‘splain! (That’s short for a’splain.)

It was the day they (not they Apple, they Hackers) announced the software-only unlocking process, and I wanted to give it a shot. We were also planning on getting an iPhone for my sister-in-law for Christmas (don’t read this, Sheireen), and I figured then was a good time to get one since they still had 4GB ones available for $299. Which was a 40% price drop compared to a 33% price drop for the 8GB ones.

I figured I’d buy a 4GB one, mod it, try it out a little, and then wrap it back up and save it for her for xmas.

So that’s what I did. After jailbreaking it, I tried out a bunch of the underground 3rd-party applications, and my absolute favorite was iBlackJack.

I don’t even get to see what he had! WHO CARES, I WIN!!

Favorite for it being the worst blackjack game I’d ever played!

Some of the faults:

  • Visually, it looked nice.. except the upside-down card was a bright apple logo, which just for some reason always looked confusingly like a right-side-up card.
  • The INSTANT the game was over, a pop-up appeared telling you if you’d won or lost. And by INSTANT, I mean INSTANT: you couldn’t even see what the dealer’s hole card turned out to be, it was covered by the pop-up!
  • Finally, and this was hard to notice because of the other problems, the dealer actually always drew exactly one card. It didn’t matter if they were already over 16 or were still under 16 after drawing, they always drew one card, no more, no less!

  • This iBlackJack was so awful it would always be the first thing I’d show to people who wanted to checkout my iPhone, just so I could sit back and watch the transition from excitement to confusion to utter disgust as it swept across the face of my victim.

    This game served as a textbook example for Steve Jobs’ argument about why he claimed they wanted to lock out third parties from developing iPhone apps: playing it made me really hate Steve Jobs, personally.

    But Then

    Sadly, this could not last forever. Updates of iBlackJack kept coming out, and within just a few weeks, all the glaring usability and logic errors were squashed. Now it’s a decent little app, and serves as a strong counter-example against a locked iPhone.

    Yes, the game was a boiling pot of dog turd at first, but now my iPhone (oh yes, it’s MINE now) has a full-featured blackjack game in it; one with such features as how many decks in the shoe, when to re-shuffle, when the dealer hits, and even if it should bother asking if you want insurance.

    We charge good drivers less == we charge bad drivers more.

    Oh Yeah, Insurance

    That’s what I was going to talk about!

    Everybody knows you should NEVER TAKE INSURANCE in blackjack. It’s yet another way gambling mimics real life.

    In real life, as in iBlackJack on your iPhone, you should NEVER TAKE INSURANCE.

    There are only two exceptions to this rule.

    One, if it’s required by law. Goddamn it, I guess you gotta get it.. but still, only get the minimum amount.

    Two, if you absolutely, positively would be ruined should the insured against event occur.. and the event has more than about a one in a million chance of occuring.

    Let me ‘splain.

    The only way to build real wealth in real life is to take risks where the total expected return is greater than the total actual cost. “Total expected return” simply being the summation of each possible return times its chance of occuring. “Total actual cost” simply being the money/time/personal cost of this risk, plus the “opportunity cost” of what other risk you could be taking.

    Cheap clip art to the rescue!

    Makes sense, no?

    Here’s an example… the “total expected return” of any casino gambling transaction is always less than the dollar cost of making it. Of course, that doesn’t make it totally irrational to gamble.. if your return still beats the total expected cost. Perhaps you derive entertainment from betting, or perhaps you would have just blown the money on strippers and blow… but it does mean it’s never a good move from a purely financial standpoint.

    On the other hand, if somebody says, “If you loan me $50 today, I’ll pay you back $80 tomorrow,” and you figure there’s about a 70% chance they’ll pay up, you should probably loan them the money. Unless of course you’ve got a less risky way to get the same expected 12% return on $50 in one day.

    Shamefully, it really does seems to be a fact of life that the higher the risk, the higher the reward. If you can accept a 90% chance of losing everything, you can find tons of investments that offer very high total expected returns… that’s even after taking the 90% chance of losing it all into account! It’s why there are venture capitalists.

    Besides taking more risk, there’s only one other way to get higher expected returns: have more money.

    “It takes money to make money”true dat, double true! “Mo money, mo problems”HA!

    I don’t see Puff Daddy complaining.

    Nevertheless, you should not be risking your entire net worth in any venture with a 90% chance of losing it all, no matter how high the expected return. Doing so is not the highway to riches, it is the trail to crazy town in a van down by the river.

    So, unfortunately, you need to have a lot of money already for the world of higher total expected return investments to become available to you. When they do become available, your wealth will then be able to grow at a faster and faster and faster rate.. creating the positive feedback loop of more money => more chances for higher returns => ever more money => less problems!

    (Except in a few cases.)

    So how do you start?

    Therein rubs the lie. If you can only really make money by already having it, you’re pretty much screwed if you don’t already have it, right?

    Yep that’s pretty much true. It’s why the rich get richer and why one laptop per child and girls don’t like boys girls like cars and money. Fortunately, there is one other way to make money, but it’s much, much, harder than all this risky investment stuff.

    Saving it! When broke, the only option to build wealth obviously is to spend less money than you earn from your j.o.b. Easier said than done.. but then you can start investing in relatively safe things: buying a house, cds, bonds, etc.

    As your nest egg builds, and you can afford to possibly lose some of it, you can start investing in riskier things with higher expected returns: S+P mutual funds, your friend’s small business, maybe even some individual stocks.

    Some of those risky investments are not going to pan out.. that’s the risk, remember? But some of them will… and since they offer higher total expected returns you’re going to end up with even more money.. and then newer and ever more lucrative opportunities will keep presenting themselves: hedge funds with $5 Million minimums, angel / VC investing, emerging market real estate, heroin import… and the cycle continues!

    It would have been better without the word "over".

    Back To Insurance?

    Oh yeah… BORING! So, the thing is, insurance is weird because it’s a reverse investment. Rather than risking money you have in the hope of getting a payoff in the future, you’re guaranteeing a loss now in the hope of not having a loss in the future.

    Now, there’s nothing wrong with that, IF the value of the loss you’re guaranteeing now is smaller than the total expected loss you’re insuring against. It’s a perfectly valid way to get a return on your money, just like using cash to pay off an existing debt is compared to starting a new investment.

    The problem is, with insurance the total expected loss is always less than the loss you’re guaranteeing yourself by paying your insurance premium every month. It’s how insurance companies make money! In fact, insurance (along with gambling) is one of the few “investments” where you know 100% the “total expected return” … and you know it’s negative!

    After all, the insurance actuaries went to a lot of trouble to figure it out for you.

    On top of that, the “total expected cost” of insurance is always higher than it seems. It’s not like you can just call up your insurance company and say “Hey, I need $35,000 to redo my floors, they got messed up” and the money is wired into your Caymen Islands bank account.

    Noooooooooo…… file any sort of insurance claim and be ready for weeks, if not months of paperwork, calls, visits, faxes, more paperwork, more calls, and finally, higher rates in the future.

    So, since all insurance is a very bad investment, you will be wealthier long-term if you never buy insurance! Of course, you’d also be better off long-term if you skipped the whole “saving, bonds, and cds” stage and went straight to “leveraged buyouts and social networking startups.”

    Like Magic Juan did!

    But you can’t do that. You don’t have the funding yet. It’s a long shot that you’re going to strike it rich on a social networking startup, so you’d better have some money saved up first. It’s a long shot that you’re going to lose your house in a fire, but you’d be ruined if it did, so you’d better get insurance first.

    However, as you progress up the ladder of more and more risky investments, one of the very first you should consider is the risky investment of “self-insurance.”

    If you’ve got enough saved so that some particular event you were insuring against would no longer absolutely ruin you, it’s a pretty good investment to drop your insurance for that and go it alone. Now you are making the profit that Allstate used to get, and you’re still “okay” in the face of a disaster because of the money you’ve saved up.

    Other Benefits

    In fact, you will most likely make more profit than your insurance company used to.

    For one, they have all kinds of overhead in dealing with claims that you’re not going to have.

    For two, people aren’t the most rational consumers when they’re not spending their own money… sure you might get your whole car replaced if insurance is paying for it. But is it actually worth $2,000 of your money just so you don’t have some ugly dents in your passenger door?

    For three, “your rate” won’t go up every time you “make a claim.”

    Send those fortune cookies back!

    Practice, Preacher, Practice

    I’ve never bought more than the minimum car insurance legally required (liability) .. the key is just not owning a car you care about at all! I never get extended waranties or travel/rental car insurance, and although I do have home insurance (it’d suck to lose that in a wildfire/earthquake/mudslide/riot), I’m about to drop all coverage for everything inside.

    I even just got a $14,000 claim for some water damage, and honestly.. it still isn’t worth it. I don’t have life or disability insurance because I think my wife would be fine with the money we already have, should I bite it or become really stupid. And I’d be fine with just paying for medical bills out of pocket if I didn’t have it through DreamHost… although I want to switch that to be self-insured too!

    Over the last ten years, I estimate DreamHost has probably spent close to $2,000,000 more on health insurance than the cost off all benefits that our employees have ever claimed.

    For a company filled with 20-somethings, (and, ahem, the newly-30) there just isn’t a lot of expensive health issues going on. If we had self-insured from the beginning, we probably could have cut out a ton of paperwork, offered even greater benefits, been more flexible with our policies, and probably had an extra $3,000,000 (with interest) tucked away for future medical expenses.

    I’m not even sure why we haven’t started self-insuring still.

    German babies are the richest.

    The ABCs of Getting Rich

    Wow, that was sum’ lonnnnng ‘splainin’!

    Here’s the executive summary:

    A. Don’t buy anything (that includes investments, expensive cars, fancy home electronics) that would ruin you if you lost it: that way you don’t need to buy insurance for it. If it’s a very good investment (like your house), only then should you buy insurance: so that it wouldn’t ruin you if you lost it.

    B. As your build your wealth, less and less things will then be able to ruin you, and higher and higher “total expected return” investments will become available to you.. take advantage!

    C. Save more money by spending more time reading free, long, blog posts.