Welcome back to another episode of the behavioral economics and marketing podcast series. This is Sandra Thomas Commonall.
Is entitled lessons from the fire in which I will explore behavioral economics, marketing, professional and personal development through the lens of having recently experienced a natural disaster. In this episode, I will be talking about zero-sum games and insurance. So jumping in, what are zero-sum games? Mathematicians, economists and analysts use the term zero-sum games throughout game theory and economic theory to describe a competitive situation wherein the profit of one equals the loss of another and vice versa, thereby nullifying the net change in wealth for participants involved.
In other words, the concept of zero-sum games originates from the idea that a win is only possible at the expense of an opponent’s loss. The net change in wealth in these situations is zero since it is neither destroyed nor created, just redistributed. So let’s give an example.
A simple example of a zero-sum game is the game of chess. In chess, there are two players. In order for one to win, the other must lose.
And to bring the concept into clearer focus, I will give another example. Poker games. Poker games are a great example of a zero-sum game and how it works.
At the beginning of a poker game, the pot determines the initial amount of money for which everyone is playing. As the game progresses, some players win money while others lose money. The combined sum of amounts of wins is equal to the combined sum amount of losses.
At the end of the game, the starting sum amount of money is still the same, it has just moved to different players for a different distribution of money. So let’s apply this to marketing in zero-sum games and insurance. If I had a nickel for every time we discussed insurance in one of my economics classes, well, I might be retired on an exotic island sipping a fruity beverage instead of sitting here speaking into this microphone.
But that just goes to show you how important the discussion about insurance and zero-sum games are. And the way I see it is that there is a reason why insurance companies are large, rich companies, and it isn’t because they incorrectly assess the risk. It is because they can accurately assess the risk that a potential client poses and can accurately assign a value to that potential risk.
For example, whenever you are at a store checking out and purchasing an expensive item or an electronic, you are asked if you would like to purchase an extended warranty on the item. The extended warranty for a $200 television will cost you in the ballpark of $29.99 for a two-year plan. Though this may seem like a small cost for your peace of mind, the truth is that it rarely adds up.
The coverage will generally include screen burn-in, mechanical failure, power failure, screen failure, speaker and sound failure, button failure, and the like. And it will not cover if you knock the TV over and break it, if you dump a bucket of water on the television, or other improper usage of the machine. Another key point is that most electronics come with a one-year manufacturer warranty that covers the same malfunctions.
And usually, by the time your television actually does malfunction, you will be ready to purchase an upgraded electronic anyway. And what about car insurance, homeowner’s insurance, or renter’s insurance? It is the same thing. The insurance company knows the probability of having to pay out and the amount that that would have to be paid and then prices your policy accordingly.
No matter which way you dice it, insurance is a zero-sum game. There is a winner and a loser, and the winner is very rarely the policyholder. If that’s the case, then why do people purchase insurance? Car insurance and homeowner’s insurance is by law mandatory to possess in the United States, but there are many people who would purchase insurance even if it wasn’t obligatory.
There are many reasons why, and here are just a few. False sense of safety and security. They know something the insurance company doesn’t, such as they like to drive and text.
They know that there is a high risk and they want it to be protected. The question I would ask is how many other products or services are you required to purchase that are really expensive and that you will almost never use? But on the other hand, insurance is there when you need it. Insurance is good to have if you don’t know how to assess your risk accurately, and most of us do not.
It also provides peace of mind that if something does go wrong, you are covered. And I will say that after having experienced a natural disaster, that I saw that the ones that were able to get out from under it, so to speak, the fastest, were the ones that were best insured. So I want to ask, do you know your risks and the cost associated with them? Most people do not.
Insurance may be a zero-sum game, but whether you opt for insurance or not will depend on your risk preference. Those that are more risk-averse will have the most insurance. Those that are risk-takers will take the chance.
Bing it up. Understanding how we as humans make decisions is an important part of marketing. Behavioral economics is the study of decision-making and can give keen insight into buyer behavior and help to shape your marketing mix.
Mathematicians, economists, and analysts use the term zero-sum game throughout game theory and economic theory to describe a competitive situation wherein the profit of one equals the loss of another and vice versa, thereby nullifying the net change in wealth for participants involved. Bing it up. If you are enjoying the behavioral economics and marketing podcast, please leave us a review, like it, share it with your friends and family, and follow us online.
Thank you for listening to another episode of Behavioral Economics and Marketing. This is Sandra Thomas-Gomenau.
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