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Gambling vs Insurance: What is the real difference?
Insurance, it is often said, covers the risk of loss by sharing the cost of replacing that loss among all the members of an insured group. But if insurance is about managing risk, some people ask, how is that any different from gambling?
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Gambling is the act of risking something of value on the outcome of an event such as a coin toss, a sporting event, or a game of chance like blackjack or playing slot machines.
If insurance is about managing risk and gambling is about taking risk, then is there some way that these two things are connected? Well, yes, if you concede that people use some of the same words when talking about insurance and gambling. But let’s take a closer look at how both insurance and gambling work and then compare them again.
What is Risk? Let Us Start with That
Risk is where you are exposed to some kind of loss. You risk the loss of your home in a hurricane. Well, gamblers risk the loss of their stakes (the money they bet). So it sounds like there is risk involved in both insurance and gambling. But that’s not really the case.
We insure against against the risk of loss. That is to say that we promise to help each other recover, repair, or replace whatever has been unexpectedly loss through insurance. Insurance is like a limited tax that is collected for the good of the group of insured people.
Through insurance we reduce risk by minimizing true or actual loss. But nothing comes for free. Insurance is based on everyone in the group helping to underwrite each other’s losses.
In gambling you willfully and knowingly expose yourself to possible loss. You take risks when you gamble with the understanding that if you lose your wager there will be no one there to help you share the loss. Well, there are gambling syndicates, of course. But they do not work the same way as insurance risk groups.
An insurance plan collects money from a group of people who face a similar risk of loss. The purpose of the collection is to replace all of the expected loss. Experience teaches us that when a storm comes through a community a certain percentage of property will be damaged. Through insurance premiums we hope to collect enough money in advance to be able to replace, repair, or recover all of the lost or damaged property after the storm. No one will come out ahead when they collect insurance.
A gamble is a situation where you risk the loss of something of value in exchange for the (random) chance of gaining something of value. There are always winners and losers in gambling. Someone comes out ahead and someone comes out behind.
So we can say that insurance seeks to minimize risk by maintaining or restoring the financial status quo whereas gambling seeks to maximize risk with the intention of changing the status quo.
What Is Loss? How Does that Differ between Gambling and Insurance?
When you gamble whatever you lose is gone forever. You may be able to win it back later but if you stop gambling after you lose your stake then you have lost your stake for good. Some people keep gambling until they have nothing left to gamble.
The ancient Roman writer Tacitus described the Germanic tribes who lived to the north of the empire as loving gambling so much that when their men had lost everything else they would gamble themselves into slavery in the hope of winning back their lost fortunes. Historians argue over how true Tacitus’ account was but it illustrates the worst potential outcome from gambling.
Historians teach us that ancient merchants invented insurance by promising to help replace each other’s losses at sea due to storm or piracy. All of the merchants made the same commitment so that if one of their group lost a ship or its trade goods the others would replace the loss. In this way they all worked together for their mutual success.
The word insurance was derived from an older word, assurance, which was a pledge or a promise or a guarantee made under solemn oath. Leaders gave assurance of their good will and peaceful intentions to each other in the ancient world, often by giving up hostages to each other. By risking the loss of the lives of loved ones the leaders, it was hoped, would be more open to peaceful solutions to conflicts between groups.
Merchants adapted the word assurance to their own needs as they gave assurances to each other that they would help replace losses when the need arose. From these informal assurances came the modern system and word insurance.
Difference Between Insurance Speculation And Gambling Act
How Does Gambling Differ from Insurance? The Simple Explanation
Gambling intentionally puts up a stake that the gambler is willing to lose.
Insurance collects payments against replacing, repairing, or recovering property that an owner is unwilling to lose.
Gambling is the intentional and willful exposure of one’s self or assets to the risk of loss.
Difference Between Insurance Speculation And Gambling Sites
Insurance is the collective intent to protect group members from exposure to the risk of loss through accident, theft, illness, or death.
Difference Between Insurance Speculation And Gambling Sites
In other words, gambling plunges into risk and potential loss in the hope of gaining something whereas insurance seeks to avoid or minimize loss because there is no gain to be had from risking the loss.