Re: AltInst: Legislation insurance

>This is the same deal a Casino sportsbook gets; I bet on the Giants,
>you bet on the Dodgers, we pay off each other and the house gets 9%
>(a $1.00 bet costs $1.10 to make). American sportsbooks have laws
>against betting on certain things like elections, and probably would
>be reluctant to insure you against legislation, but a British casino
>would probably be delighted to take your bet.

On a related note... as has been pointed out, there are only subtle
differences between betting on something and insuring something... it
also seems there are only subtle differences between the above and
investing in something. They are all mechanisms through which third
parties can gain a financial stake in a risk. In betting, unlike
the other two mechanisms, however, the principles cannot directly benefit
from this activity.

I don't actually know much about any of these topics, but here is
my take on how these mechanisms relate:

insurance
 - principals pay risk-takers
 - risk-takers pay more back to principals if certain events
  (things they insured against) occur
 - if certain events don't occur risk-takers profit
 - in some cases risk may be bought and sold
 - agents may be involved, and if they are they always profit

investment
 - risk-takers pay principles
 - principals pay risk-takers (in the form of dividends) if certain
   events (they make a profit) occur
 - risk-takers may buy and sell their risk, sometimes at great
   profit or loss
 - buying and selling risk is done through agents
 - agents always profit

betting
 - risk-takers put money in escrow with agents
 - principals do not pay money, nor do they earn direct benefit
 - if certain events occur (teams win) some risk-takers profit and
   others lose
 - agents always profit

Interestingly, despite the similarities between these mechanisms
they are generally regulated in very different ways. So in situations
where one might be illegal, it seems you should be able to achieve
a similar outcome through one of the other mechanisms. (If betting
on elections is illegal, invest in candidates. Where it is illegal
to bet on race horses, why not set up a racetrack stock exchange
for trading shares in race horses?)

Lorrie

--------------------------------------------------------------
Lorrie Faith Cranor lorrie@research.att.com
AT&T Labs-Research 973-360-8607
180 Park Ave. Room B224 FAX 973-360-8809
Florham Park, NJ 07932 http://www.research.att.com/~lorrie/

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Received on Tue May 5 12:41:51 1998