Being inconsistent is next to being a doofus, and none of us wants to be one. So, you’ve probably applied the Grand Principle Of Consistency to insurances: you either have none (optional ones, I mean) or you simply exclamate a resounding yes! to almost every suggestion a telemarketer is apt to make to you.

Unless, of course, you have deduced some rules you always apply. Consistently.

Today I had an interesting discussion with my colleague. His suggestion was rather smart one, though simple (hey — many smart inventions are simple as an afterthought, no?). The suggestion was to pick those insurances which have relatively negligible costs AND cover you against damage which is Absolutely Inconvenient To Endure. Another proposition is that appropriate conditions and/or environment exists for the unwanted event to occur. Insurance against water or fire damage in a condominium is a good example. If you accidentally start a fire due to negligence destroying several other peoples’ property, the cost could be so high that your economy would be totally ruined. Then again, an anti-example would be the theft of your beloved mountain bike. I mean, it is now sooooooo shiny and nice to ride with Xenon lamps, carbon fiber wheels, GPS nav computer and whatnot, but after six years or so you’ll be ashamed of showing in public places with the bike because it would be then soooo 00′ies. Getting the bike stolen could be a disappointment in the scale from ε to ξ, the latter being somewhere in the neighborhood of getting your Aztec megalopolis Chihuahuatitlan devastated by the dastard attack of those puny, wretched French in Civilization 4, but not much more. I mean, you have to weigh the product <monetary loss due to theft of the bike> times <probability of the French making their move> against definite loss of monthly/annual money to Acme corp (dial 1-800-gullible-fool for our best offer) insurance company. Yeah.

An inverted principle along the same lines suggested by the friend — somewhat surprisingly due to bad odds — is that it is good to play lottery using negligible investment (yes, I’m very well aware of the phrase lottery is an added tax for the mathematically/probabilistically challenged). The idea is that spending something like 0.2 per cent of your net income to lottery your purchasing power is not diminished at all, whereas in the (extremely unlikely) event you can get gazillions of cash. Well, almost. I mean, Canon EOS-1Ds Mark III with some fine glass costs only so much, and hitting the jackpot in the lottery affords you at least 100 copies, even after taxes. Unless you’re stupid enough to pick a pattern (like your birthday) shared by thousands of other people.

I’d like to refine the principle, but at the moment I’m only able to refine the mentioned idea. Any suggestions?

Nevertheless, next time when you are negotiating with an insurance agent, even if you choose to ignore risk analysis and/or probabilities, remember that the real professionals behind the rates do know their Poisson distributions and eat standard deviations spiced with root mean squares on breakfast. Rest assured that all the tools they posses will be used against you. You’d be better off starting from the definition unless you haven’t yet.