Saturday, May 30, 2015
Regret theory in practice
I rented a car.
Supplemental insurance for the car - which reduces excess from 2000 Euros to zero - was 14 Euro per day (for nine days). The car is automatically insured beyond a 2000 Euro excess.
I did about twenty seconds thinking and elected (against my wife's wishes) not to take supplementary insurance.
(a). I pay about $800 a year for a $40,000 car in Australia. It gets driven a lot. That works out at under $3 per day - and it covers considerably more than the supplemental insurance - which makes the supplemental insurance look expensive.
(b). Against this I would be driving about 5x average - somewhat offsetting this - and on the opposite side of the road. Thought of that way the insurance is not massively mis-priced.
I figured there was less than a 10 percent chance of a dingle - but more than a 5% chance. The insurance looked expensive. I am a hedge fund manager and paid to take rational bets. So I declined the insurance.
You guessed it - I had a dingle.
The 2000 Euros is financially irrelevant to me. [It is way less than I risk, personally, every day in the stock market.]
But I am surprisingly, irrationally unhappy about not taking the insurance.
It is widely observed that people (likely including my clients) are irrationally affected by small losses.
But they pay me to be rational. And I insist on being so - but it is harder than it looks.