Posted by Johnnymac 5:59 PM
And now for a tangent:

When you think about it, "insurance" is actually the perfect word to describe this side bet because it is precisely what is happening here: a player is selling some of his risk to another player and thus the cost of any bad luck is spread out. This is exactly what happens in the real world for insurance against things like homes, cars, and health - a participant pays a certain amount in premiums in return for protection against a risk. Because there are costs associated with running the business (overhead), and because the insurance company needs a profit incentive for providing the service in the first place, an insurance premium is typically going to cost you more than the true odds of that house fire or broken leg or stolen car actually occurring. Thus, if we were all truly rational human beings no of us would ever want to pay for an insurance premium for exactly the same reasons as Doyle Brunson says to avoid taking insurance in a card game: it's a bad bet. But none of us are perfectly rational - and more importantly, not perfectly rich, and thus we often see the cost of the insurance premium as being worthwhile when connected to the overall cost of the bad luck we might incur, no matter the odds of that bad luck occurring.

We do have one thing in our favor compared to a poker game and that is that there are more choices, and hence more competition, in the financial insurance market than just the other ten guys at the poker game. As such, financial insurance companies are willing to accept a much smaller edge in their bets than would the guys in the poker game, so much so that they have a huge incentive to know just exactly how large or small that edge is relative to the true odds of whatever catastrophe they may be insuring against. There are entire industries and professions devote to precisely this pursuit of odds: actuaries. Similarly, because financial insurance is a much larger market with many more customers than in a poker game, the small edge that insurance companies end up taking is OK, because the scale of the enterprise allows the overall profit to be large enough in the end.

We've only touched on the subject here, but Craig's dilemma is a great example of how poker, and the decisions made therein, is analogous to the real world. Just like everything else in life, poker is about decision-making and the profits from those decisions.

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