Marginal Revolution: Family day in Ohio

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Family day in Ohio

"Tim Harford says we shouldn't buy rental car insurance!" That was not The Economist in the Family, that was Natasha (!).

Posted by Tyler Cowen on May 19, 2006 at 09:07 AM in Travels | Permalink

Comments

Well, I can tell Tim one reason this stuff gets sold -- very high pressure sales tactics. I avoid best buy largely for this reason.

The last time I had to activate a new debit card over the phone, I was forced to listen to two very pushy protection plan offers, and to decline each one twice, WITHOUT the number to push to decline being mentioned, before the bank would declare that the card was activated. It left me wondering how many people accidentally sign up for the insurance, just because they can't figure out the phone menu.

Posted by: DK at May 19, 2006 9:31:14 AM

A fine article. But it leaves me asking, what do economists have to say about the fact that we all make such elementary mistakes? I know there is a lot of research done on such things, but somehow it doesn't seem to affect most economists' basic faith in the virtues of markets, or to get into undergraduate courses that frame student's outlooks. How come? Do you really think that failures like these are marginalia?

It seems to me that almost by definition they can't be marginal -- if we are all dropping dollars on the sidewalk for companies to pick up, it is rational for them to build more sidewalks. And so they do -- witness extended warranties as one example.

Posted by: tom s. at May 19, 2006 9:42:40 AM

... or, having now read the intriguing Rabin and Thaler paper pointed to by Mr. Harford (http://risk.behaviouralfinance.net/RaTh01.pdf), I guess that should be "given that expected utility is an ex-hypothesis, why is it still front and centre in the courses that shape Economists' worldviews (econ 101)"?

I guess I'm missing something here, but I'm not sure what.

Posted by: tom s. at May 19, 2006 10:09:49 AM

Mightn't people be paying for the feeling of security as well as the security itself? Surely being free from worry has some value.

Posted by: ombudsman at May 19, 2006 11:29:53 AM

I think the argument against it underestimates how liquidity-constrained a lot of people are. A lot of people out there wouldn't be able to come up with a $900 deductible on short notice. Also, a lot of times the extra insurance contains a convienience factor. Best Buy, for example, includes that they will provide a replacement product quickly, whereas the manufactuer insurance typically involves shipping the broken product back to them.

Posted by: MattXIV at May 19, 2006 12:01:25 PM

Also, not everybody has the same time-to-failure distribution for the product. If you keep your stuff in less than idea conditions, then it may actually make sense to get a warranty that wouldn't make sense if you expected your time to failure to be average or better. Moreover, people aren't always honest in what they try to get covered under warranties. Many consumers aren't above wiping that spilled Mountain Dew off the X-Box and claiming that it was a defect.

Posted by: MattXIV at May 19, 2006 12:11:25 PM

Following up on MattXIV, I've cashed in on my cellphone "protection plan" for things which no actual warranty would cover. I probably made money on the deal.

MattXIV's point about people's liquidity constraints is also quite good. I'm recently (in the past 2 years) in a position where a $500 to $1000 unexpected payment for something breaking is now something I can afford, but for the previous 19 years of my adult life, if I couldn't get someone else to pick up the bill, it would go on a credit card at 18% or higher interest.

I've always declined rental car supplementary insurance, though, as it was a risk I've been willing to take. The rental car companies will state that my insurance won't cover the loss of use of the car to the rental company, but I figured that in that event, I'd be willing to subpeona their records to prove that the car wouldn't have been rented, and/or that they've delayed the repair in bad faith to run up my bill, or at least make them spend on lawyers more than the damage to the car.

Posted by: Anthony at May 19, 2006 12:34:50 PM

Tim Harford doesn't seem to realize that most credit card products bundle rental car insurance at no marginal cost.

My Diners Club card offers primary insurance. Almost any premium Visa, Mastercard, or American Express will at least cover the costs your insurance company does not, such as the $900 deductible Harford references.

Several cards whose coverage is generally secondary provide primary coverage when the driver is not otherwise insured.

Check the fine print or call your credit card company to find out.

My point is -- the economic error is even worse than the article would seem to indicate. People aren't just paying too much for something. They're paying too much to buy something THEY ALREADY HAVE.

Posted by: Gary Leff at May 19, 2006 1:15:06 PM

DK:

Not to pry, but was it Chase? They bought my old bank and I had an identical experience with my new card. I'd never seen anyone quite that pushy before.

Posted by: Jason Ligon at May 19, 2006 1:38:53 PM

No, although I'm not going to say who it was. It must be spreading throughout the industry, tho.

Posted by: DK at May 19, 2006 3:40:57 PM

Another issue is that rental car insurance saves us a lot of headaches. The actual cost savings is not just the $900 deductible, but also the aggravation of having to deal with the rental company in another country with other customs, possible police/judicial involvement, and lots of paperwork. The seduction of the insurance is that it makes the hassle go away, and the value of that depends on the person. If I were to rent a car in a foreign country whose language were only known to me through a phrase-book, I'd be very tempted by that policy.

Posted by: Tom at May 19, 2006 6:39:40 PM

Where in Ohio?

Posted by: Robert Schwartz at May 19, 2006 9:23:13 PM

Yes indeed, driving wildly in someone else's car in a foreign country is well worth $10.

Posted by: Josh at May 20, 2006 10:53:57 AM

In my experience, insurance *adds* time and hassle to replacement, rather than removing it, and time has value. For a $90 cell phone with no insurance, replacement after a theft is as simple as walking into a store and plunking down $90; done. With insurance, there are police reports to file and forward to the insurance company, adjustors to talk to, paperwork, paperwork, and more paperwork. And in the meantime you probably had to front the $90 anyway in order to get a new phone quickly. For anything short of a major loss, the value of one's time spent collecting a payout (even on a low income) further offsets the benefit of insurance.

I haven't had to deal with a lost of damaged rental car before, but I'm suprised to hear that having insurance through the rental car company makes things easier. If so, I think it's the exception, because it's simply replacing one insurance (theirs) with another (yours) -- when the issue is self-insurance vs. "actual" insurance, self-insurance is always easier in terms of time. So it's not worth it unless the risk is too great, or the price is low enough to compensate you for your loss AND your time. And the price is rarely low.

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