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    Personal Insurance Blog

    Risk Management: When Intuition Fails Us

    Posted by Gordon Atlantic Insurance

    Sat, Feb 11, 2017 @ 11:37 AM

    Appreciate your brains decisions on risk management and auto life commercial and personal from Gordon InsurancePeople often fail to appreciate what amazing machines our brains are. How many times have you wished you could do math like a calculator in your head (especially when figuring out a 22% tip on a $321.56 lunch bill split between 13 people)? Well, we shouldn’t be so quick to condemn our brains.

    It’s safe to assume you’re reading this post right now. Your brain is translating the thousands symbols you see into sounds; sounds into words, words into sentences. It’s drawing upon thousands and thousands of memorized meanings to get what I’m trying to say into your head.

    Further, you’re probably reading in a chair right now; so on top of decoding this post, your brain is also performing countless calculations to balance your hundreds of muscles so that you don’t fall to the floor as you read… God help you if you’re standing. Oh, and not to mention that your brain is also controlling the millions of cells and enzymes that regulate your breathing, feeling, and digestion …all this without you even realizing it. The amount of electrical activity in your brain would easily short-circuit your pocket calculator, and your brain can maintain that activity for about 80 years.

    So we have remarkable machines within our skulls, which usually do a pretty good job of assessing danger; we know not to shower with radios, etc. But sometimes, our brains are so active that they make mistakes and our intuition fails us. This happens commonly with risk.

    If you haven’t read our post about the math behind insurance, I suggest you read it quickly, because the probability functions behind the simple games in that post are very similar to what your brain does automatically. For every risk you take, your millions of neurons perform a cost-benefit assessment.

    Let’s say that it’s a nice day. You know that you’ll enjoy yourself outside and you also know that there’s a very small probability that you’ll get hit by a meteorite. However, your brain quickly calculate that the rewards are much greater than the risks, and you go sunbathing. Normally, this process is very effective, but our emotions sometimes distort this process and mislead our intuition.

    Think about how many times you’ve seen people drive to the beach and then refuse to swim because they’re ‘really afraid of sharks.’ This is a classic misrepresentation of risk. The chance of getting into a car crash on the way to the beach is thousands of times higher than the chance of being attacked by a shark, but it’s the shark attack that people are scared of.

    This is what psychologists would call a misrepresentative heuristic: the process that we use to calculate chances is distorted by our thoughts. Even though we have a better chance of winning the lottery than being munched on by JAWS, the fear that accompanies a shark attack leads us to assign an artificially high concern level for an event with a very low probability.

    This is also the case when talking about poisonous spiders, lightning strikes, and other things that go bump in the night. Our impulses are good things to keep in mind when fear prevents us from having fun or enjoying life.

    INSURANCE QUESTION?
    Corbin Foucart

    Tags: psychology, risk, management, insurance, intuition, shark attack, math

    The Simple Math Behind Insurance

    Posted by Gordon Atlantic Insurance

    Fri, Jan 20, 2017 @ 12:00 PM

    Educate yourself about insurance with Andrew Gordon IncToday, I was figuratively slapped in the face by the realization that I’ve never blogged about the mathematics behind insurance. This is surprising to me, having blogged about insurance for over a year now and having loved math since childhood as a Rottweiler might love a T-bone steak.

    If you really can’t stand math and have no interest in how insurance agencies can afford to replace huge losses frequently, then look at another post. But the concepts behind why insurance works are relatively simple and easy to grasp; for me, they offer a great example how inferential statistics never lie when calculated correctly. The following is a VERY simple description of the math that lets your insurer protect you.

    The first concept that insurance relies on is known to statisticians as “the Law of Large numbers” and it’s best explained by example.

    Let’s say you’re sitting in your office, bored by whatever menial task is sitting in your inbox, and you decide to play a game. You pull out a coin and you see how many heads you can flip in a row. You flip one or two heads in a row easily. But you start to find that it’s much harder to keep getting heads (assuming you’re flipping fairly).

    This is because the probability of you flipping a head is 1/2 or 50%. But 2 heads in a row is (1/2)*(1/2) or 1/4 or 25%. So statistically you’ll only flip 2 heads in a row once out of every 4 tries. That’s discouraging. The probabilities get lower and lower very quickly. The probability of flipping 6 heads in a row is 1/64 or 1.5%. You could try 100 times and have it happen only once or twice. Suddenly, your neglected paperwork seems much more friendly.

    Let’s say you get discouraged and you decide you’re going to play a different game instead. Let’s also assume that you’ve grown up under a rock and you don’t know that the probability of flipping a head is 50%. So you decide to record the number of heads and tails you flip.

    The first two coins you flip are heads! Wow! It appears as if the rule is that every time you flip a coin, you get a head! The probability of flipping a head is 100% according to your data! You are unsure though, so you keep flipping. Next is a tail. Aha! So you were wrong… the probability of flipping a head must be 2/3 or 66% right? Because that’s what you’ve flipped so far…

    As you continue playing this game, we both know that your record will get closer and closer to 50% as you flip more and more. In other words, because of what you discovered with your first game, it gets harder and harder to ‘fudge’ the probability the more you flip. Mathematicians go one step farther to say that if you take any event (say, a tornado blowing Dorothy’s house away) and record lots and lots of trials, the results get closer and closer to the actual probability with each new trial, eventually getting so close that you can just accept the result as the actual probability.

    The second concept behind insurance is called a ‘weighted probability.’ This is a little more complicated, but much more relevant to insurance.

    Let’s say that you decide to leave your office and start using your new-found understanding of probability to gamble. You encounter a man on the street who offers to play a game of chance with you. You roll a fair dice; if you roll a 6, he gives you $6. If you roll anything else, you give him $2. Should you play?

    The answer is no. You will lose money if you play long enough. Here’s how I know. Mathematicians have developed a formula for finding the average amount of money gained or lost in situations like these. Simply, the result is obtained by multiplying each probability by the money gained or lost and adding the results.

    For this game, here’s what we know:

    • The probability of rolling a 6 is 1/6 (there are six numbers, so you roll a six one time out of every six)
    • The probability of not rolling a six is 5/6 (rolling any of the other five numbers)
    • You get $6 for a 6
    • You get -2 dollars for anything else

    So on average: (-2)*(5/6) + (6)(1/6) =  -0.66

    You lose an average of 66 cents per game. And we know from game number 2 in the office, that the more you do this, the closer the average loss will be to negative 66 cents. If you play 1,000 times, you will lose 1000(0.66) = 660 dollars. Hopefully you’ll stop playing before that happens!

    So what does this have to do with insurance? Well, we know that insurance agencies insure lots of people (they have to, or else it wouldn’t work, just like the coin!). Every person pays a small amount of money each month and nothing happens to them. But every once in a while, an insurance company will have to pay lots of money to a single person.

    So let’s play one last game:

    • You’re a small insurance company that insures 1000 people.
    • Let’s say that 1 house will catch on fire per year.
    • So the probability of a house catching on fire is (1/1000)
    • Therefore the probability of a house not catching on fire is (999/1000)
    • If a house catches on fire, you have to pay $200,000
    • Every person pays you $20 a month, $240 per year

    Let’s use our formula:

    -200,000*(1/1000) + 240*(999/1000) = -200 + 239.76 = 39.76

    So you’ll make $39.76 on average per person insured. Therefore you’ll make 1000*(39.76) = $39,760. Now our hypothetical insurer can use that money to buy 1/2 a cup of coffee at Starbucks!

    Now this is a really simple example (with really small numbers), but it’s the same math that insurance companies hire statisticians to calculate for them. In fact, there's a whole branch of mathematics related to this concept called Actuarial Science, which I've always found cool.  By collecting lots of small payments, companies know that probability will protect them from the occasional loss. That’s how we stay in business.

    Hopefully this post helps you understand a little more of how the insurance world works.

    INSURANCE QUESTION?    
    Corbin Foucart

    Tags: insurance, Mathematics, concepts, behind, math

    Redefining Risk

    Posted by Gordon Atlantic Staff

    Fri, Feb 01, 2013 @ 08:00 AM

    Learn about risk with andrew gordon inc insuranceRisk. Danger. Peril. Hazard. These words certainly do not have the best connotations. In fact, it's next to impossible to use these words to express something positive. After all, risk is a possibility of loss.

    Did you know that every single action you do carries some form of risk? Whether it's walking up the stairs, folding some laundry, or eating a bite of that delicious ice cream sundae (see right), each and every action has some possible form of risk.

    Severity of Risk

    Ok, so the examples above are pretty mild when it comes to risk. If you are an optimist, I encourage you to think of the positives. If you are a pessimist, try not to get too paranoid. But here are several outcomes that can happen when walking up the stairs:

       1. You walk up the stairs safely with no issue.

       2. You stub your toe on the steps. (Ouch!)

       3. You trip and fall up the stairs, embarrassed and slightly injured.

       4. You fall backwards and break something important (like an arm).

    Ok, so we only have four of any number of possible outcomes that can occur while walking up the stairs. While, if you walk up stairs often, the first outcome is the most likely (let's say 99% of the time), you cannot ignore the other 1% of possible outcomes.

    Likelihood of Risk

    So now that you've opened your mind to some of the several possibilities that could happen to you when walking up the stairs, turn your attention to other things, like car accidents and hurricanes.

    If you are a licensed driver, how often do you drive? How good of a driver are you? How long is your commute, what type of roads do you drive on, and what type of drivers drive around you? All these (and more) are essential factors to determine your risk of driving on the road.

    We've all heard the statistics about car accidents, and in recent years storms have gotten a lot worse (Katrina, Sandy, Irene, etc.) causing billions of dollars worth of damage. Has that damage happened to you? No? Will it happen to you? Maybe.

    You can't predict when loss will occur. All you can do is know that you are always at risk. Will you live a risk-free life? The odds say that no, sometime in your life you will most definitely face loss. We don't know when that one (if it's only one) time will be. And depending on your lifestyle, you could be facing multiple instances of loss within a few years. You won't know until it happens.

    Reducing and Redefining Risk

    Here at Andrew G. Gordon, Inc., our job is risk management. We want to reduce the risk of your loss, and we have many ways for you to do so. For starters, we have a wide variety of checklists - (hurricane preparation, homeowner's) of steps for you to follow to reduce your loss. We also post a wide variety of blogs, which include several different safety tips and guides (ranging from pumpkin carving safety to motorcycle safety to skiing safety). For a more interactive experience, we also have our famous whiteboard videos.

    If you subscribe to our blog, watch a video every now and then, or check our website out once in a while, you are reducing your risk by educating yourself. However, to effectively reduce risk, what you learn must be put into action (i.e. actually stopping at a stop sign vs. knowing that you should stop at a stop sign).

    Unfortunately, risk can never be completely eliminated. However, reducing it to the smallest amount possible is by far the best option. By preparing, we redefine risk as something that even if it happens, there is minimal (if any) loss.

    If you have any other questions, feel free to click the button below to contact us directly. Learn more about personal insurance here.

    Contact Us

     

    Tags: risk, personal, insurance, definition, redefining, prevention, loss, math, statistics, probability

    Why an Insurance Blog?

    Posted by Gordon Atlantic Staff

    Wed, Dec 05, 2012 @ 04:34 PM

    ResearchMaybe you've stumbled onto our website by mistake. You had an insurance question, and somehow the links brought you to us here at Andrew G. Gordon, Inc. Perhaps you browsed our website. You maybe requested a quote, viewed a checklist, or watched one of our famous whiteboard videos. No matter what you did, now you're here at our insurance blog. But why a blog? Why can't we just have pages like regular websites do?

    Insurance is our business, and we like to keep you as up-to-date as possible. An insurance blog allows us to do that DAILY. We have several different blogs, so whether you're looking for some personal insurance info, or are searching to answer some questions about commercial insurance, we've got you covered.

    You might find some of our blogs ridiculously funny, super informative, or a combination of both. To help you begin, I've selected a few of the most visited and helpful blogs:

    -The Simple Math Behind InsuranceSimple Math

    -The Difference Between a DUI and an OUI

    -Having a car accident in a car that isn't yours!

    -MA Surcharges: 20 Minor Violations That Increase Insurance

    Whether you chose to read one, two, or all of my selections is up to you. We also have many other blog posts on a wide variety of topics, just waiting to be read. Our content is continuously updated and you may uncover a few facts that you didn't know before- guaranteed these random tidbits of information will benefit you and your insurance knowledge.

    As we've said SO MANY TIMES before, insurance is complicated. It's best to widen your breadth of knowledge through something like quick insurance blogs from us than to sit down the night before and research everything all at once. And what if you have a spur-of-the-moment crisis, like a car accident? Knowing some info about your insurance and the accident would be super helpful during a time such as that.

    If you have any questions, feel free to contact us by clicking the button below. We love answering questions, and maybe your question could be the topic of our next blog! Learn about personal insurance here.

    INSURANCE QUESTION?  

    Tags: insurance, Complicated, blog, videos, whiteboard, math, why blog

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