Going back to First Principles

A fantastic article by FT’s Willem Buiter on gambling vs. insurance

For the insurance industry, the insurance vs gambling distinction was operationalised using the concept of insurable interest.

He goes on to lay out, why insuring things which one does not own, leads to negative externalities

The traditional Islamic opposition to trading risk without there being an insurable risk – to gambling, that is – extends well beyond the financial sphere.  Indeed, in much of traditional Judaism and Christianity as well, gambling and betting are viewed as signs of moral weakness – as sins.  But these moral, ethical and medical (gambling as an addiction) arguments are quite separate from the argument I have explored in this post, that risk trading without an insurable interest may be economically inefficient and destructive, not (just) for familiar moral hazard or micro-endogenous risk reasons but for macro-endogenous risk reasons.

Worth the 15 mins it would take to read and understand it!


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