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Insurance and Risky Opportunities

Now we will travel back in time to the beginning of the year and start all over.

This time you have 2 choices

You could pay money that would provide an insurance payout that would pay off your loan in a bad year, but would cost money even if its not bad.

Again, you have a 1 in 5 chance of drought.

The insurance is a financial service, not a gift so you only get as much money in the payment as you put in on average. That means if you get 5 coins as the insurance payout in the bad year, you will have to pay 1 coin each year, plus any finance fees.

We have 5 packages of gum in my hat.

  • The 4 blue ones represent a year with adequate rainfall

  • The 1 red one represents a year with a drought

We will randomly draw one of the packages from the hat, and if its red, there was a drought.

Now--make two separate choices!

1) Productive risk

  • Put your left thumb up if you take the chance

  • Put your left thumb down if you stay with your current, low productivity package

2) Insurance

  • Put your right thumb up if you buy insurance

  • Put your right thumb down if you do not buy insurance