Buying Peace of Mind


After diving into the World of Ergodicity I took a step back and let the information settle in. Was there really a point there? Was behavioural science unable to explain certain choices people made? Were behavioural scientists too quick to label a choice as irrational, whereas it was a perfectly sound and logical choice from an ergodic perspective? Were we wrong? One of the choices I’m referring to is that of buying insurance. I reference it in the Ergodicity article as well. The idea of buying insurance, on a macro level, is “irrational”. Why is it irrational? Well, because insurance companies are clearly making money of the population as a whole. If they weren’t, they would’ve gone bust a while ago. But they haven’t, so clearly, they’re over-charging us. As a population, we should rise up, demand fairer prices and then still continue to buy insurance. Because that is the type of people most people are. The reason we’d still buy insurance, although maybe now against a slightly lower monthly tariff, is because on a micro level, we don’t care too much about being irrationally “ripped off”. On the individual level, you’re not being ripped off. What you’re doing is insuring your belongings, your house, your health, your family’s health, your travel and maybe to some extent event your finances. You don’t buy insurance to get a good deal out of it (although getting a good deal is always nice). You’re buying insurance to buy peace of mind.

The whole idea of insurance is that when something does go wrong (laptop gets stolen, house goes up in flames, the medical bills stack up) there is an institution that you’ve paid money to help you out. That when something bad does happen, that you don’t have to deal with the full brunt of it. At least not financially. And given that some people near faint at the idea of something bad happening to them, this isn’t such a bad idea. Insurance is a concept designed for the risk-averse among us. Thing is, most people are risk-averse. They will pay not to have to deal with risk and things that are risky are of less value to them. So if you can insure against it – or can at least find a way to not have to carry the full (financial) load of the consequences of something averse happening to you – well, a lot of you would. And there’s nothing irrational about that. Somehow the monthly payments to the insurance company, although repetitive and annoying, pale in comparison to you imagining your house actually going up in flames, and having to deal with the financial fallout of that. Because, and this is a rather inconvenient truth: a lot of people wouldn’t be able to cope with that financially, let alone psychologically.


So there’s plenty of arguments for buying insurance as a way of buying peace of mind. I’d like to give you another example: investing money. Or rather, not investing it at all. Peace of mind can also be a reason why people don’t invest their money, or why they exclusively invest passively (say in index funds). If the idea of losing money sends them into a frenzy, well, investing isn’t really for them, is it? There are ways around this. As I said, you can just invest passively by buying index funds. This way your risk is highly diversified. Your eggs aren’t all in one basket. For a lot of people this is still doable, especially as being active (or in this case, passive) in the stock market has become the “new thing to do”. However, for some people this is already too much, and they need a little more help. Companies such as OxfordRisk create personality profiles for their investors, so they can figure out how risk-averse someone really is. This personality trait matters quite a lot, and in the case of OxfordRisk (and very likely also others) it changes how information is presented to the customer. People who are very risk-averse should not be presented with short-term horizons, as a small loss on a short-term horizon will present itself as a very steep decline in resources, and as such, as a massive risk of losing resources. The same goes for presenting a risk-averse person with the performance of a stock or portfolio – there needs to be a focus on longer-term horizons so they can see the larger trend, and not the short-term peaks and troughs. I think this is generally good advice, not just for us risk-averse. Everyone is currently screaming that you need to invest your money because you’re otherwise just wasting it on inflation. Unfortunately, they are not wrong. However, do figure out what type of investment you are comfortable with, and take your time getting comfortable with the idea (take months, not years). If you do invest your money but end up so stressed over it that you can no longer properly function, something has gone awry. It makes very little sense to me to put money into something that will reduce your (mental) health. Also, and this is not financial advice, but it's not that smart to invest money you might still need in the short term.


I’m sure you can think of many other things you can buy for peace of mind. Getting quicker, more expensive, delivery on a product so you can have it before a trip, rather than after, because you’re concerned about leaving it lying about for too long, or it being in a depot for too long. Buying the 1-day rather than 2-day PCR test result, just so you definitely have the result in time for your flight and you don’t cut it too close for comfort. Buying all-inclusive holidays or fully arranged holidays so you know what the price and the itinerary is and don’t have to worry about those. Like I said, there’s many more examples of this. If you’ve carefully weighed the two (or more) scenarios of spending less and having to wait longer and all the stress that may cause vs. spending more and having to wait less long with reduced levels of stress, and you have, knowing yourself and knowing you currently “can’t deal”, chosen the latter option, well, there’s nothing wrong with that, is there now? I’ve always been a sucker for buying peace of mind. Sue me. Or rather don’t. It sounds very stressful.