The Emotional Money Trap: Why We Love to Gamble But Hate Buying Insurance

When we think about the most profitable industries in the world of risk, two giants stand out: the gaming and insurance industries. They are ‘money making machines’ who are both are masters at rigging the odds to ensure they make money. The irony is these two industries lose money all of the time too! On any given bet or policy, they may pay out more than they collected on that individual. The key to their success over time has to do with two factors. 1) “The Law of Large Numbers” which basically states when considering multiple samples (bets/policies) the averages work out, and 2) They never put at risk so much money on any one bet/policy that if they lose money (the gambler wins or the policy owner has a maximum claim) they will go broke…

It is a simple yet fascinating model that most understand, but few try to duplicate in their lives. 

Instead, they try to create their own wealth by following the examples of those who beat the odds which is unfortunately why so many people struggle to achieve the results they want.

Lets explore these two businesses to understand how we might be able to model them to create and maintain exceptional wealth for ourselves instead of attempting to beat the odds to accomplish the same. 

How the House Always Wins: The Mechanics of Profit in Gambling and Insurance

Casinos are synonymous with the thrill of chance, but behind the glitz and glamour lies a meticulously rigged system. Every game in a casino is designed with a built-in advantage for the house, known as the “house edge.” This edge ensures that over time, the casino will always come out on top.

But the rigging doesn’t stop there. Casinos set limits on how much can be bet on a single play, ensuring that even if a player beats the odds, the potential loss for the casino is capped. This is a critical part of their risk management strategy – they may lose individual plays, but they’re engineered to win the game which is all that matters.

And what about the high rollers who do win big? It is all part of the strategy to seduce more gamblers into their facility. Who can resist the possibility of proving their exceptionalism by beating the odds and putting their own money at risk. Don’t worry about the big payouts they have to give out occasionally either…

First of all, those losses are never so much that the casino has to stop playing. As a matter of fact, they  have a seductive strategy to keep the big winners playing. They provide complimentary rooms, meals, and entertainment – all designed to keep the winner betting. Because they know (EVERYONE KNOWS…) the longer a gambler plays, the more likely it is that the house’s edge will prevail, and the winnings will flow ALL back to the casino.

Oh, if you could only own your own casino and rig the game to favor you it would be like a money printing machine, right….?

The Art of Selling Security: The Business Model of Insurance

Insurance companies, on the other hand, sell the promise of security. But don’t be fooled – they’re just as calculated as casinos when it comes to rigging the game in their favor. Through the process of underwriting, insurers carefully assess the risk of each policyholder, setting premiums that ensure they collect more than they pay out.

Just like casinos, insurance companies have their own version of a bet limit: they never take on a risk that could potentially bankrupt them. If a potential claim is too large, they’ll either refuse offering coverage or spread the risk by purchasing something called reinsurance. This is insurance for insurance companies, a safety net that protects them from catastrophic losses.

But here’s the kicker: insurers often buy reinsurance for events that are incredibly unlikely or may have never happened before BUT COULD. They buy the reinsurance because they are smart enough to know if that event does happen, it has the potential to financially devastate the company and shut them down.

It’s a paradox I want you to understand and take note of – Insurance companies are in the business of assuming financial risks, yet they also insure themselves against some of the very perils they’re protecting you and all of their other policy holders from.

For example, my company Decision Tree Financial is in Florida. Florida tends to get these wind storms called hurricanes now and again. Insurance companies have a pretty good idea of the damage these storms are going to cause based on history, BUT…

They also know ‘the next one’ could be bigger than anything that happened before in the history of Florida and with all of the new people living in the state, the economics of that unprecedented storm could cause more claims than they can financially handle. Imagine if conditions we right to have a Category 5 storm sit off of the cost and push storm surge deep into the west coast of Florida destroying 50% of the cars in the state. If that happened, most companies would fail if they don’t have the financial support of another larger insurance company who is collecting premiums for other unprecedented risks like Earthquakes, Volcanos, Floods or Tornados in all the other parts of the world.

(By the way, reinsurance is one of the reasons insurance is so expensive in Florida. They require more money to assume these large risks so they can both ensure they can cover them for their policy holders and make more their own profits. If they don’t believe they can do this, THEY DON’T EVEN TRY TO PLAY THE GAME by now offering coverage in the state. A lot of insurance companies are doing just that, moving out of high risk areas like Florida and California where they can’t predict their loses or rig the game to their liking.)