The “Moral Hazard” of Insurance

In the insurance industry, the idea that the protection insurance offers the consumer promotes a more reckless attitude on the part of said consumer is referred to as “moral hazard”. Apparently, since we have the material possessions in our homes insured against burglary, we are less likely to lock our doors for example. While I consider this an issue of contention, I do see competitive insurance as a for profit endeavor to be a serious moral hazard.

All forms of insurance seek to achieve the same end. Take a catastrophic event like a fire in your home; The goal is to spread the risk of suffering a loss among a larger number of people. Essentially, we each contractually pay into a shared savings account. In the event of a fire, the burden of recovering from this fire is paid for by the shared account. The insurance company would rather it be said that you pay a premium in exchange for the company assuming the risk rather than you. This is not the case; effectively we are insuring each other against fire, theft, car accidents, flood, dog bites, and the like. So what does the insurance company actually do?

Well, the insurance company takes all that premium money and invests it. Then they make profits off the interest. They don’t really provide any sort of service. They actually sell us all our own money back to us at a profit. I call that a “moral hazard”.

To make matters worse, excepting legislation to protect the consumer (gee, wonder why that had to happen), the insurer is the arbiter of who gets insured, at what rate, and what benefits they are entitled to should a claim be made. This offers the insurance company the opportunity to control risk. You can see the power of abuse inherent in such an oversight of the basic function of insurance when you consider the pre-existing condition exclusions that are at the center of our national health care debate. This is another great example of a real “moral hazard”, and its not you and I failing to lock a door.

Allowing ANY exclusion or variance based on social characteristics (high theft neighborhoods have higher home and car insurance premiums for example) does not properly serve the interest of the consumer and is itself a near-certain moral hazard. Sure, if my home costs 2,000,000 to replace and yours costs 95,000, I would expect to have a proportional premium. Allowing geography to play into it, however, is punitive and a disservice.

Taking away the ability of an insurance company to assess risk, however, removes all purpose from the enterprise. Insurance companies, unlike other businesses, cannot control the supply of their service (Blue Cross can’t add more doctors to Summa) or otherwise add value. Instead, they must either reduce the quality of the actual service provided to the consumer (HMO’s and “Recommended Collision Repair Centers) or take advantage of statistical (but not certain) data about the social and behavioral characteristics of certain consumers. Both, clearly, are ripe for hazard of the moral kind.

All this makes insurance a unique “product” that’s very nature renders it unsuitable as a private enterprise. If being in the business of making money off the fact that suffering and misery WILL happen, but maybe to somebody else, isn’t a moral hazard, I don’t know what is.

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I think my feelings on illegal immigration have at last reached critical mass. Arizona’s new social travesty masquerading as a Law is akin to punching Lady Liberty in the bread box. I am ashamed to share a nationality with these people.

No illegal immigrants are taking jobs from “us”. There is no “us” and “them”. There are millions of PEOPLE living here, fancy papers and skin color aside, that work, go to school, buy food, see movies, mow the grass, raise children, and even pay taxes. These PEOPLE are US.

If the good citizens of Arizona were really interested in curtailing immigration they would rally federal support for accountability of American enterprises operating in Mexico. They would urge Congress to enforce a minimum wage on those companies and insist they honour environmental laws. But that’s not what its about.

Hiding behind the noble banter of “Rule of Law” and “Illegal” lurks the insidious secret of the right: They hate these brown bastards. Pure and simple.

This law doesn’t just compel Arizona Police to ferret out working class people and treat them as criminals. If that’s all they were after they already had that power available. Rather, it gives not only the power but the obligation to demand proof of citizenship “where reasonable suspicion exists that the person is an alien who is unlawfully present in the United States”. Guess what guys, they sure ain’t going to reasonably suspect Little Johnny Irish of being here illegally. That honour goes to the brown people of Arizona; apparently automatically guilty, and required to prove themselves innocent.

I’m sure that this law will not last long, as it violates the Constitution(Article 1, Section 8, supported by numerous Supreme Court cases as giving Congress the power to govern entry into the country). The real issue here is how misled the whole thing is and how disheartening it is to watch what are otherwise good people succumb to hate.

I’ll leave you with the poem on the Statue of Liberty:

Not like the brazen giant of Greek fame,

With conquering limbs astride from land to land;

Here at our sea-washed, sunset gates shall stand

A mighty woman with a torch, whose flame

Is the imprisoned lightning, and her name

Mother of Exiles. From her beacon-hand

Glows world-wide welcome; her mild eyes command

The air-bridged harbor that twin cities frame.

“Keep ancient lands, your storied pomp!” cries she

With silent lips. “Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tost to me,

I lift my lamp beside the golden door!”

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Healthcare Law Henceforth

I propose a new law that will empower all people. It is called the Health Care Reform Amendment Act 2010 and will henceforth be called The Law, with all the weight and profundity so implied.

Past reforms have proposed ridiculous ideas such as giving all people free health care managed by the government, while others have proposed forcing individuals to buy health care. These are all ridiculous and untenable. How can one imagine a resource distribution model that circumvents the market place? I call such nonsense flatly un-American. This is, above all things, a deeply principled nation after all.

I propose a new free market approach. First, company HR departments will be prohibited from buying insurance for their employees. This will empower individuals to research and purchase insurance based on it’s merits and price.

Second, we will circumvent the Hippocratic Oath by prohibiting individuals from going to the hospital if they do not have insurance. It will now be a crime punishable by fine and imprisonment.

This will empower individuals to make their own decisions about healthcare. Smart, shrewd individuals will be rewarded, while those who make bad decisions will be punished with death in the street at the scene of a car accident. More important than rewarding good decisions, The Law must assuredly punish bad ones. Its the American way.

These changes are necessary America. Without them, we will continue to give away health care and promote moral hazard in it’s most dastardly form and individuals will be crushed under the force of bureaucracy and government. I am sure you all agree no fate is worse than that dealt at the hands of government; even an identical or markedly worse fate at the whim of the American privateer.

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Poor and Minority Effects on the Subprime Crisis & The Economy as a Whole

This supposed link between minorities and the sub-prime crisis has bothered me for quite some time. Many conservatives are making the argument that illegal immigrants, minorities or the poor along with their Democratic allies have somehow created this sub-prime crisis. My fundamental argument is that the poor and minorities don’t control enough wealth to have the impact that conservatives are implying.

Let’s start with some basic numbers and do some basic arithmatic. The estimated value of the stock market in the USA in 2008 was 36 trillion dollars. The value of all real estate owned by households was in the range of 20 trillion. Insurance companies held 6.3 trillion, while the US GDP was 13 trillion. Commercial banks held about 10.8 trillion. Even with massive overlap in the asset classes that puts us up to at least 65 trillion in trade-able assets. The sub-prime was estimated at about 1.4 trillion in 2007, which makes it about 2%.

It gets a bit harder to discern what percent of the 1.4 trillion in subprime loans were made to minorities, illegal immigrants, and poor people, but one can estimate that if they were able to get loans at a rate similar to whites, then the percentages of loans should be similar to their percentage of the population.

That gives us the following.

  • 9.4% Black Subprime = 132 Billion = 2/10ths of a percent value of US tradable assets
  • 10.4% Hispanic Subprime = 146 Billion = 2/10ths of a percent value of US tradeable assets

Out of these numbers, what percentage could be illegal immigrants? Let’s estimate high and say that 25% of Hispanic, subprime loan customers are illegal. That gives us the following

  • 2.6% Illegal Hispanic Subprime = 36.5 Billion = 1/20th of a percent value of US tradable assets

Honestly, what effect could 1/20th of a percent have on our economy. It just sounds like rhetoric.


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Ultra Libertarians vs. Compasionate Anarchocapitalists

I often read Matt Assay’s “Open Road”. For the most part I like reading his take on the open source world, but every now and then he posts something that makes me feel like I am researching lesser known connections of some political organization. Really, I didn’t know the Heritage Foundation was connected to Chechnyan Rebels. But wait, aren’t they leading the war on terror?

Recently, he posted a comment about the the differences between the Apache licensing and the GPL (here). I followed one of the links to a blog post from a guy named Benjamin Black (here), notice the title. Both are positing that the Apache license is better than the GPL because it allows more freedom and does not infect your code like a virus, which is generally true, though I am not convinced that this is worse than total freedom. They posit that this can lead to abuse.

Benjamin Black gives two examples of people abusing the GPL. His first example may have some merit (here). It looks like they are dual licensing it, which means they can choose who gets freedom to do different things. The second example is of from Zed Shaw who wrote Mongrel which is a web server that, I believe, is popular among Ruby programmers, though I have never used myself. Zed explains that if he doesn’t GPL than other people and companies can abuse him, which he explains here (here). I think Zed makes a fairly strong, if emotionally connected, points and I feel quite similar to him when I am coding myself.

Either way, I am glad we have the choice between all of these different licenses, but I think I will stick with the GPL for now. The debate rages on, which side are you on?

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Has Web 2.0 had a Corrosive Effect on Democracy?

About two months ago, I watched a documentary on PBS entitled The Truth According to Wikipedia. As the title suggests, the film focuses on Wikipedia. But it’s really an exploration of how the Internet has enabled worldwide collaborative ventures, and how this has affected the way the world gathers, assembles, shares, uses, and discusses information. The creators were able to present in a clear, informative manner (a rarity for issues-based documentaries, in my experience) the reasoning of both proponents and critics of Wikipedia-style approaches to online media.

One of the critics featured in the film is Andrew Keen, founder of the defunct website, During the 90’s and early 2000’s, Keen was a strong proponent of Internet ideals, such as universal access to digital content, but more recently has developed a profound distaste for all things Web 2.0. In the past few years, he has gone on the offensive, arguing that the core values of the New Internet – decentralization, participation, and user-generation of content – have had an increasingly corrosive effect on our economy, politics, and culture. Consider the following excerpt from the film, where Keen addresses an audience of Web 2.0 architects and enthusiasts who believe that their,

‘MyWorld’ … will lead to ‘more democracy, more equality, and more freedom.’ Now I [i.e. Keen] strongly disagree; that’s the essence of my polemic. I argue ‘me’ – that this personalization of media, personalization of culture, the fragmentation of society, indeed, into ‘me,’ into everything becoming increasingly more personalized, is resulting in reality in less democracy, less equality, and less freedom. (The Truth According to Wikipedia, @ circa 12:15 – 13:01)

A bold thesis, to be sure. One that challenged me to evaluate my own intuitions on this issue and intrigued me enough to read Keen’s book on the subject, The Cult of the Amateur. I wanted to see how strong his argument was in support of his view. It essentially boiled down to this:

1. In order for our culture to survive. society needs “gatekeepers,” individuals whose judgments and abilities to perform certain duties can be trusted.

2. Experts and professionals are the gatekeepers of society.

3. But Web 2.0 principles destroy expertise and professionalism, since they require that one extol the anonymous amateur, elevating amateur judgment and performance to a level equal with and sometimes even superior to that of the expert or professional.

4. Therefore, Web 2.0 principles are a threat to the survival of our culture.

Keen spends virtually no time arguing for (1) and (2), instead opting to make the case for (3). He cites statistics about how, since the mid-90’s, profits have increasingly fallen in professional journalism and the music and film industries; he highlights cases where misinformation spread via the Internet has had damaging effects on people’s personal and professional lives; and he points to trends in marketing that increasingly blur the line between advertisement and content.  According to Keen, this evidence not only shows that blogs, social networking cites, and peer-to-peer file sharing technologies are responsible for lost revenue in journalism and the entertainment industry, effectively ruining the careers of media professionals the world over, it shows that amateurs and advertisers are taking over their roles and filling the Web with untrustworthy, low-quality content.

Of course, Keen’s own interpretation of this evidence is questionable: one could maintain that professional journalism and the music and movie industries are seeing reduced profits because they employ a legacy business model ill-equipped for the digital age, and one could dig in one’s heels and cite contrary evidence regarding the amount and quality of trustworthy content on the Internet. But debating the fine points about how Keen’s evidence should be interpreted is really a moot point. His analysis suffers from a more basic problem insofar as he has, at best, shown only that increased untrustworthiness of Internet content and decreased revenue in professional journalism has coincided with the implementation of Web 2.0 principles when what he needs to show in order for his argument to work is that the implementation of Web 2.0 principles has caused the supposed ‘destruction of expertise and professionalism.’

But suppose for a moment that Keen does establish a causal connection. Should it then be beyond any reasonable doubt that Web 2.0 threatens to unravel our culture? This hinges on the plausibility of Keen’s assumptions that gatekeepers are needed for the continuation of culture and that only experts and professionals can fill that niche. Now even granting that professionals are to be exclusively identified with gate keepers, it doesn’t necessarily follow that professionalization of a field or cultural activity will guarantee its survival. Indeed, as I have written elsewhere about my own field (i.e. philosophy), professionalization has largely proven to have a cannibalizing effect and the key to its survival may perhaps involve some degree of “informalizing” and “amatuerizing.”  So, contra Keen, Web 2.0 principles might enhance rather than threaten the survivability of culture in at least some cases.

Of course, Keen could admit that a healthy dose of amateurism is needed, while still maintaining that a society’s culture can’t do without its gatekeepers. But this begs the question: just what is it about the role of the gatekeeper that makes him or her so indispensable?  According to Keen, culture is about truth, and “the gate keeper is the key player in the truth, because the gatekeeper, whether they’re an editor at an encyclopedia, or a record agent, or a newspaper publisher, they’re the one’s who determine truth” (The Truth According to Wikipedia, @ circa 24:00-24:20) And in The Cult of the Amatuer, Keen draws on the work of anthropologist Ernest Gellner and political scientist Benedict Anderson to explain that gate keepers provide society cohesiveness by presenting the public a shared narrative and common worldview:

As anthropologist Ernest Gellner argues in his classic Nations and Nationalism, the core of the modern social contract is rooted in our common culture, in our language, and in our shared assumptions about the world. Modern man is socialized by what the anthropologist calls a common “high culture.” Our community and cultural identity, Geller says, come from newspapers and magazines, television, books, and movies. Mainstream media provides us with common frames of reference, a common conversation, and common values. Benedict Anderson, in Imagined Communities, explains that modern communities are established through the telling of common stories, the formation of communal myths, the shared sense of participating in the same daily narrative of life (The Cult of the Amatuer, p. 80).

The notion that truth, trustworthiness, and their intimate relationship (among other things) lie at the heart of culture should be unproblematic. However, Keen’s description of culture’s gatekeepers as determiners of truth sounds far less like our own cultural ideal – namely, a culture that is both free and democratic -  and more like the ideal state of Plato’s Republic. Indeed, Keen’s gate keepers are virtually indistinguishable from Plato’s description of the guardian class, whose role is to present a noble lie to an overwhelming mass of people inherently incapable of understanding truth. The culture Keen envisions is oligarchic, one in which societal control is placed in the hands of an elite class who have presumably exclusive access to truth and a monopoly on creativity. By contrast, a democratic society, whether it has professionals or not, leaves no room for Keen’s gate keepers. It assumes a fundamentally different epistemology and “technology” – one in which each person is presumed to be endowed with an inborn capability to discern truth and to utilize their creativity for productive purposes. Reality is supposed to be the determiner of truth, and it is through observation, conversation, and debate that we arrive at it. If anything, then, the principles of Web 2.0 would seem to compliment or support the ideal of democratic culture, rather than usher in it’s demise.

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Has Web 2.0 had a Corrosive Effect on Democracy? by Nathan M. Blackerby is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.

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