How risk-averse people incur more losses than others do

Trevor Pateman

Hypothesis: In seeking to insure themselves against everyday risks, risk-averse individuals will often do things which increase the likelihood of loss. There are many products on the market sold as protection against risk which actually increase the likelihood of being hit by the risk protected against.

Example: Suppose I have a postage stamp which may well be worth a thousand dollars. But I need an expert's opinion to confirm this and the expert is on the other side of the Atlantic. How should I pass the stamp to the expert?

There are many options. Travelling with the stamp is silly, since I will spend more than a thousand dollars on the trip.

Most people will choose to send the stamp by some form of insured mail, which is a very lucrative business. But this is also silly.

Insured mail is identified by a plethora of labels, sometimes for tracking, sometimes declaring the nature and value of the item enclosed. Anyone who works in mail handling and who has an inclination to steal will read the labels as saying, "I am valuable. Please steal me". In some countries, such thefts are carried out by organised criminal groupings. As a result, an insured letter has less chance of arriving than a letter sent by ordinary, uninsured mail. That's why insured mail premiums are high, since there are so many pay outs to be made.

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Objection 1: Some thieves target items going to a particular address, knowing that they are likely to contain valuables. Not insuring the letter makes it easier for the item to be removed from the delivery chain.

Response: An individual whose mail is being targetted will soon get to know it and have to devise a strategy to overcome the problem. It is highly unlikely that he or she won't advise senders on what to do in such circumstances.

Objection 2: If the recipient does not have to sign for the letter I have sent, he or she can claim that the letter never arrived - and thereby steal my stamp.

Response: The recipient can easily sign for a letter, slit it open, remove the stamp, and then advise you that AFTER signing for the letter, he or she noticed that it had been tampered with - in transit - and the stamp removed.

Further examples:

- Home Contents Insurance. Isn't it just a bit dumb to tell all these people totally unknown to you that you have Diamonds worth millions in your home (to be precise, in your bedroom in a pink case)? Do you have such total confidence in the security of their databases from systematic or casual theft? Haven't you read in the newspapers about the casual loss or organised theft of discs packed with unencrypted personal data about you?

- Domestic burglar alarms

- Car alarms

- Briefcases with security locks

- Putting a return address on mail that is going to someone, like your Dad, who you know for sure lives where you have addressed the letter. Don't pretend you are insuring against the risk of him dying tomorrow and you not knowing until your letter arrives back..... You just want the world to know that your letter is IMPORTANT and that you are VERY NERVOUS about sending it.

- In the old days, people in countries where mail was censored often stuck stamps on the back of envelopes to seal the flaps more securely against intrusion. This was very helpful in guiding censors towards letters that should be opened.

Published on this website January 2009