Tag: Risk Assesment

Family Guy — Volcano Insurance

A traveling salesman sells Peter an insurance policy to protect his home against a volcano eruption. He convinces Peter “a volcano is coming this way” despite the fact that Peter lives in Rhode Island, far away from any active volcanoes. He convinces Peter to purchase the policy by using the gambler’s fallacy and convincing Peter that Rhode is “due for one.”

If this were actually true, the premiums associated with this policy would be extremely high and likely be the same as the cost that an actual volcano would inflict on the town. Insurance markets function on the interaction between uncertainty, risk aversion in consumers, and risk neutrality for firms. If some horrible event were guaranteed to occur imminently, there would be little incentive to sell insurance.

Thanks to Alex Marsella for the clip submission and most of the summary!

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The Big Short — Risk vs Reward

In this scene from The Big Short, the traders illustrate the concept of risk/reward payoffs using Jenga blocks. When trying to determine which investments to approach, the safest returns (the blocks at the top) are the easiest to invest in, but they don’t offer much of a return because they are so safe. The investments that are a bit risker (the blocks at the bottom) are compensated with higher returns to compensate investors who take the risk.

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Moby Dick — The Ship

Two potential sailors come aboard the Pequod to inquire about becoming joining the crew. Peleg asks why any man would want to become a sailor when the conditions are so rough. He works through the requirements of being a sailor to make sure the men are willing to undergo through strenuous conditions. The reason whalers were so well-paid at the time was because the risk of death aboard the ship.

Here’s a good interview from The Daily Show with Jon Stewart and the captain of a fishing boat on the show Deadliest Catch.

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Bleacher Report — The Coach That Never Punts

 

At Pulaski Academy in Arkansas, Kevin Kelley’s team never punts because he opts for high risk decisions because the probabilities are in his favor. He doesn’t believe in taking the risk averse method and he also believes in focuses on his team’s comparative advantage instead of just doing the traditional method.

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Always Sunny — Smoking in the Mailroom

Charlie decides to start smoking in the mailroom because it’s a stressful job and the cigarettes help him calm down. He rationalizes it that it’s okay to do something so risky because he has health insurance. In economic terms, health insurance creates a moral hazard because Charlie is only smoking because he knows he has insurance and he wouldn’t be as risky without it.

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