Managing Risk: Car Insurance Edition
- Posted by chicagosean
- on September 27th, 2012
This is a little anecdote that I just have to get off my chest.
As an options trader, I know that hedging downside risk comes at a premium. Often too expensive than it’s worth. And the reason makes sense: people are afraid of losing money on their investments, so they are willing to pay a premium to prevent that from happening (at least in theory).
So, last night I was in the process of buying a car. It’s been 10 years since I’ve owned a car (city living, baby!), and even longer since I purchased one. I found the whole sales process comical.
While showing me a variety of cars, the salesperson goes into great detail about the safety and reliability of each vehicle. And when we hone in a couple that have caught my eye and we go on test drives, he raves about how “this car is built to last! You’ll go 100,000 miles before you need to do anything more than regular oil changes on this beauty.” He emits all the latest buzz words that evoke reliability, stability, sustainability… practically guaranteeing me that absolutely nothing will ever break on this vehicle. Ever. You get the point. It’s a sales pitch and I take it as such.
Fast forward… The salesman has made his sale. I’m hooked. Sign me up.
After filling out a mountain of paperwork, processing a down payment, and filling out a financing form, the salesman then shakes my hand, thanks me for my business, then escorts me down the hall to the “finance department” to process my car loan application. I put the finance department in quotes cuz in this operation it was really just one nondescript office with an aging and shy middle-aged man (think Milton from Office Space).
He and I spend a couple minutes reviewing the numbers. Everything seems in order. I’ll have no problem qualifying for the advertised interest rate. Yada yada yada, all good. And then “the shift” happens.
Remember that vehicle I was sold that was the most reliable and dependable piece of machinery ever? In this new office, it’s as if those words were never spoken. Mr. Finance Guy (we’ll call him Milton) dives into the Platinum Warranty sales pitch. After telling me it’ll cost $1700 I politely cut him off and say “no thanks.” He seemed unfazed and then launches into a litany of every possible thing that will likely go wrong and cost me a fortune out-of-pocket if I don’t have this warranty. Each time I say no, he’s armed with another angle. He appeals to my savings account. “Do you have enough savings in case of an emergency?” He questions my manhood. “Are you an expert in car repair?” He challenges my driving skill. “Do you have a lead foot? Are you heavy on the brakes?” And on and on and on. After hearing me say no 8 or 9 times, he appears to finally relent.
We get back to the busy work of filling out papers, submitting electronic requests, stuffing envelopes, etc. But before the final piece of paper is signed he goes in one more time and says: “How about, if instead of $1700, I offer you the Platinum Warranty for $800. That seems like a no-brainer, right?”
No sir, it doesn’t. And you just exposed your service as a complete ripoff.
The moral of the story: Insurance is often way more expensive than it needs to be. Remember that next time somebody sells you puts to hedge your long $AAPL position.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Sean McLaughlin - Editorial, Curation, & Investor Relations Solutions at StockTwits. Also, former Member of the Chicago Board of Trade who trades his own account in Boulder, Colorado. More »
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