03-26-06 - 2


It seems to me paying taxes on my poker winnings is -EV. Say my taxes are X. If I don't pay and get caught, I'll suffer penalties and interest that might double it, to 2X. Paying the taxes is only +EV if the chance of getting caught is > 50%. I don't think it's even close to that, maybe more like 10%. This is a gamble just like everything, but the +EV seems to be very clearly not paying. It's sort of odd to me to make good EV decisions and make poker winnings and then make a bad EV decision and pay tax on it.

On a related note - I think car insurance is pretty clearly -EV. The car insurance companies just skim a huge profit, and furthermore they don't really provide a service the way catastrophic insurance does, since if the "worst" happens and you car is wrecked, that's not so horrific. They're not really amortizing anything for you.

That is, say the bad thing happens, it costs you -C. The chance of it happening is P, so the expected cost is P*C. A zero-profit insurer would charge you about P*C. Now, if C is very large and P is small, you should be willing to pay a premium, because if C happens you're screwed and have no recourse. This happens for like farmers and other disaster coverage, where if the bad P event happens their business is destroyed, they can't pay C, so it's worth it to pay a premium. On the other hand, if you can easily cover the cost C, then paying any premium for the insurance is ridiculous, the insurer is basically providing you no service.

Of course in the real world unfortunately car insurance is needed because of punative damages and all that nonsense, people suing you if you happen to injure them.

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old rants