Insurance is a kind of business and its profit is the difference between customers contribution and total amount paid out to compensate for losses suffered plus operating expenses. That is the policy holders agree to pay premiums against the insurers promises to.
- Difference Between Insurance And Gambling
- Difference Between Insurance Speculation And Gambling Companies
- Difference Between Insurance Speculation And Gambling Act
In my early years in the insurance field, it was quite difficult to convince myself, let alone others, that insurance is not the same as gambling. In those days, any attempt to convince someone on the need to buy insurance was almost always met with resistance and a concluding remark that, “No, I can’t buy your insurance. I don’t like gambling.”
Difference Between Insurance And Gambling
As I progressed in the profession, it gradually became clearer to me that insurance is distinct from gambling. But the fact remains that many people out there still remain difficult to convince. They hold strongly to the view that insurance is gambling and, for many of these people, they would never have anything to do with any of the two.
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From the surface, insurance and gambling look alike: they have to do with risks, they are both contracts, and payment is made from a pool of fund in both cases. Insurance and gambling fall within the aleatory category of contracts. By definition, aleatory contracts are those “contracts in which the performance of one or both parties is contingent on a particular event.” They are both contingent on “something happening.”
- Gambling refers to wagering money in an event that has an uncertain outcome in hopes of winning more money, whereas speculation involves taking a calculated risk in an uncertain outcome.
- May 26, 2015 Gambling is fundamentally different from investment and speculation in following respects. Quick Outcome: Normally Outcome of gambling is know very quickly. The outcome of rolling a dice or the turn of a dice is almost known quickly.
For gambling, you take a bet and if you win, you get paid. But if you lose, the other party profits by pocketing your money or whatever you bet with. For insurance, you get paid if the insured event occurs. If you are lucky (or, is it unlucky as some people claim?) that you do not suffer any loss; the insurance company keeps your premium so you get nothing from them. When one looks at insurance from this perspective, it becomes quite easy to conclude that insurance is the twin sister of gambling.
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I must accept the fact that this was actually the way people perceived insurance at its early stage of development. The first life insurance law which was enacted in Great Britain in 1774 was aptly titled Gambling Act 1774 (or Life Assurance Act 1774). It illegalized gambling with people’s life. Prior to the advent of this law, it was possible for David to insure the life of Charles with a view to profiting from the death of Charles, whether or not there was any financial interest or relationship between the two of them. In other words, before the passing of the Life Assurance Act (Gambling Act) on 20th April, 1774, one could take out a life insurance policy on anybody’s life (including a criminal) with the expectation that the person insured would die before a specified date. If death occurred as expected, profit would be made by the one who arranged the insurance as he would receive a payment. The law stopped all this form of gambling practices.
One of the easiest ways of differentiating between insurance and gambling in this modern days is to look at what gamblers and those who buy insurance do. A gambler pays to take an unnecessary risk. He creates a risk for himself and he knows full well that he would either win (and make profit) or lose (and bear the risk of losing his money). On the other hand, someone who buys insurance is actually paying the insurance company to avoid the consequences of risks that are necessary. The risks are already there for him, duly identified, and he is paying to avoid or minimize the negative financial effects those risks could have on him. Such risks being insured against are essential for human development and they include, among many others, the risk of accident while travelling in a car, the risk of fire while manufacturing goods in a factory, and the risk of falling and dying while constructing a 25-storey building.
Gambling belongs to the class of risks known as “speculative risks.” These speculative risks present one with the probability of making a profit or losing. There is no in-between. You either lose or win. Insurance, on the other side of the coin, belongs to the “pure risk” classification of risk where one either suffers a loss or remains in the same position (i.e. neutral). One does not profit from a pure risk exposure. If you insure your car for a year and no loss is recorded, you simply continue to ‘cruise’ your car around (i.e. neutral).
If the above still confuses you, I think you can just distinguish between insurance and gambling by looking at your insurance premium as the price you pay to buy yourself peace of mind from identified risks. Once you pay the premium to the insurance company, you buy peace of mind because of the promise you receive from the insurance company that payment would be made if you suffer a loss. You don’t buy such peace of mind when you put down your money in a bet. In fact, when you put your money down in gambling you actually buy yourself some worries and apprehension. You are scared that you may lose and say goodbye to your money forever. But if you win, luck is probably on your side. Unlike insurance, nobody promises you that payment would be made if you lose in a gambling attempt.
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Right before the 2010 Super Bowl, a page 1 article in the February 5, 2010 Wall Street Journal opened with this sentence:
“Investors are sometimes accused of treating the stock market like a casino. Now, one Wall Street firm wants to treat casinos like the stock market.”
The article details the decision of a Wall Street bond-trading company to take over the management of sports betting at a new Las Vegas casino. Lee Amaitis, the company executive who runs the betting operation, says the firm got into sports gambling because “we wanted to turn gamblers into traders.” Using sophisticated financial-markets software, bettors can not only bet on the final outcome, but also make wagers on events during the game, such as whether the next pass might be completed, or who kicks next field goal.
On several occasions, the article noted similarities between investing and gambling. The article even featured a bond trader-turned-professional gambler who said “Wall Street is just a form of legalized gambling.”
Difference Between Insurance Speculation And Gambling Companies
Is investing just a form of gambling? For many investors, the answer may be “yes.” But it doesn’t have to be. And it probably shouldn’t be.
In July 2000, Tom Murkco, the CEO of Investor-Guide.com, published an essay titled “What is the difference between gambling and investing?” While Murkco noted that many aspects of gambling and investing might appear similar, there were several distinct and easily defined differences.
For either investing or gambling, the beginning of Murkco’s definition is the same: An activity in which money is put at risk for the purpose of making a profit.
But while the purpose of gambling and investing is identical, the methods by which the purposes are achieved are drastically different.
Here are Murkco’s distinctions:
Here are Murkco’s distinctions:
When someone invests…
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- sufficient research has been conducted;
- the odds are favorable;
- the behavior is risk-averse;
- a systematic approach is being taken;
- emotions such as greed and fear play no role;
- the activity is ongoing and done as part of a
- long-term plan;
- the activity is not motivated solely by entertainment or compulsion;
- ownership of something tangible is involved;
- a net positive economic effect results.”
When someone gambles…
- little or no research has been conducted;
- the odds are unfavorable;
- the behavior is risk-seeking;
- an unsystematic approach is being taken;
- emotions such as greed and fear play a role;
- the activity is a discrete event or series of discrete events not done as part of a long-term plan;
- the activity is significantly motivated by entertainment or compulsion;
- ownership of something tangible is not involved;
- no net economic effect results.
Difference Between Insurance Speculation And Gambling Act
When defined this way, it’s easy to see the differences between investing and gambling. It’s also easy to see that because of the methods some people use to invest, their behavior may more closely resemble gambling.
Texas holdem poker apk online download free. For example, industry studies have repeatedly shown that the behavior of mutual fund investors often accounts for poor investment performance. Because they don’t approach investing systematically, emotions like greed and fear may cause people to make impulsive decisions, with little or no research. Not surprisingly, the results from these methods more often resemble the returns from lottery tickets.
Not Gambling with Your Investments: Easier said than done?
In his book, Snap Judgment: When to Trust Your Instincts, When to Ignore Them, and How to Avoid Making Big Mistakes With Your Money,author David Adler says it’s the psychological component of investing that is the most difficult to manage. Adler contends that behavioral research shows many individuals have an almost over-whelming set of hard-wired dispositions to take gambles rather than make investments. Adler quotes Andrew Lo, an MIT professor of finance:
In his book, Snap Judgment: When to Trust Your Instincts, When to Ignore Them, and How to Avoid Making Big Mistakes With Your Money,author David Adler says it’s the psychological component of investing that is the most difficult to manage. Adler contends that behavioral research shows many individuals have an almost over-whelming set of hard-wired dispositions to take gambles rather than make investments. Adler quotes Andrew Lo, an MIT professor of finance:
“The same neural circuitry that responds to cocaine, food, and sex has been shown to be activated by monetary gain as well.”
For some people, the thrill of investing/gambling can be addictive. But when the stakes are one’s financial future or retirement, or your children’s college education, the need for a thrill shouldn’t come by jeopardizing one’s investments.
This imperative to not compromise investing by gambling highlights one of the greatest benefits of working with a team of financial professionals: Besides receiving informed advice, a financial professional can often serve as a protection against gambling with your investments, by encouraging you to make sound decisions based on good research that have a high likelihood of success.
Take a moment to consider the last few major financial decisions you’ve made in the past year. Then look at the list above. Did you make an investment or take a gamble?