The Kelly Criterion: A Mathematical Approach to Insurance Decisions
2024-12-21
This article explores how the Kelly criterion can be used to make rational decisions about insurance. The author debunks common misconceptions about insurance, arguing it's a mathematical, not philosophical, problem. The core idea is that insurance prevents significant wealth drawdown, accelerating compound interest growth. A formula is presented to calculate the value (V) of insurance, considering current wealth, premium, accident probability, and cost. Motorcycle and helicopter insurance examples illustrate the calculations and deductible's impact. The author explains how insurance companies profit and the relativity of costs.