In an era of market-topping closes, which of these do you most represent -- the insurer or the gambler?

What if everything they ever taught you about risk was wrong?

And I’m not talking “wrong” in the sense that Galilean transformation inaccurately describes motion compared to modern relativistic formulae. The difference between those two approaches can be measured in digits well to the right of the decimal point.

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I’m referring to a wrong that, quite possibly, might be more akin to those Seven Deadly “wrongs” mentioned in a certain well-read book popularly used by preachers and Sunday School-marms.

The misuse of “risk” is actually less of an ethics question and more of an applied science question (see “The Folly of Risk and the 401k Fiduciary,”, July 11, 2017). To understand this, we need to understand the difference between how an actuary views risk versus how a casino operator views risk. Both individuals work in industries ruled by the law of large numbers. Both use statistics determine how to optimally price their products. Both sell their products to a vast swath of the population, where race, color, creed, as well as income status, mean nothing.

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The difference between an actuary and a casino operator lies not in the back-end of their operations, but in the front-end. It’s in how they position their product and the marketing strategies they use to sell their product to the mass market.

These different approaches, in turn, cause their consumers to view their products through different lenses. Insurance, fundamentally, is a business proposition based on the amorality of mathematics. Gambling is nothing more than a leisure activity, its only redeeming value being it relieves someone from the horror of sitting through yet another remake/sequel/reboot of some nearly century-old comic book superhero.

This becomes clearer when we consider how customers “play the odds” (aka “manage risk”) in both industries.

You buy insurance to protect your downside. You agree to pay a little bit of money to stave off losing a lot of money. In the end, you actually prefer to lose that little bit of money rather than go through the agony of losing and then replacing what ever asset you happen to be insuring.

Think about it. Sure, the insurance company will replace your car, but do you really want to go through the trouble of breaking in a new car? You really like that car you’re driving. The last thing you want to do is replace it. Still, from a purely mathematical perspective, it makes too much sense not to get insurance (besides, most states require you have auto insurance). It’s a form of sound risk management.

Consider, on the other hand, the point of view of the Black Jack player. He sits there counting cards (until the casino finds out, that is), trying to determine the most likely next play from the dealer’s hand. Here “risk management” doesn’t mean preventing losses (although it does hope to reduce losses), it’s meant to answer the question on whether the bet makes sense. In other words, are you more likely to win rather than lose. For those that doubt this intention, recall all those gags about a bookie plying his “sure thing” tip.

No insurance agent ever tells someone buying a policy is a “sure thing” to make money. It might be a “sure thing” to make yourself whole again, but it’s definitely not something that produces a dramatic return on your premium payment.

Therein lies the difference between and insurance company and a riverboat gambler. One emphasizes loss prevention. The other seeks inordinate gains.

In an era of market-topping closes, which of these do you most represent?