This is the healthcare marketplace specialization, healthcare marketplace overview. I am Steve Parente and this is module 3.1.1, risky business. So the concept of risky business, what we are really talking about is making decisions under uncertainty. And by uncertainty what we are referring to is a situation where more than one event may occur, we just don't know what that event might be. So if we look at our first illustration here, example one, we had a computer and you know, inside that computer is a wonderful chip most likely from Intel. Intel puts out brand new chips all the time. You're investing in Intel, you're hoping to make some more money, you're not quite sure whether or not you're going to have a good investment from Intel or bad investment depending upon how it's received into the market. You make a gamble, there's a sense of what that might be, and then you sort of play off and see where that would go. Another example is a little more personal, closer to home. You have an opportunity to get a flu shot or not in the fall. You want to make sure that you don't get too far under the weather. You know you might be the type of person where you just don't get sick that often, but for all you know there's a flu strain that comes around, there's a bunch of people in the office, they all have sick kids, they all want to breathe on you. And so you know you could be very happy and basically not have anything happening and all, or you could be very sad and infirmed because you did not get your flu shot, but granted there is no guarantee that flu shot will actually do exactly what it needs, but more often than not it can actually do some good for you. So these are essentially different choices you make all the time and it's not just the binary choice, you can obviously a whole range of choices, and these are the decisions that you've faced. Now, to actually be a little more structured that we have this concept of risk. And risk basically is a probability, a probability that essentially somewhere between zero to one you will have some chance at something good or bad will go wrong. In terms of insurance, we usually talk about something bad going wrong. And so if you think about flipping a coin, that usually translates into a probability of 0.5, giving you some sense of you know, heads or tails that things could go wrong. And so one thing that we try to do in insurance is to figure out what that probability is actually going to be, and by getting that probability estimate, whether or not it's you know 0.1, something can go wrong. That's actually the mortality rate for folks that are older. You can flip it around and say, you know, you have 9% chance of having really healthy outcomes past the age of 60. These are all very specific point estimates that are trying to give an actual parameter to the concept of risk. And that's really core to insurance, insurance needs to essentially have those numeric estimates, and they are just estimates, to be able to make the actual models for insurance companies operate. Now, when we think about the cost of risk, which is another major concept, what we have to understand is that some people are willing to be risk takers. So you can have someone here who loves to ski. This is my own skiing thing, and are going downhill, and they're going to be really happy but they could run into a tree. Now the reality is that skiing actually, even snowboarding, is sort of a risky operation. If you're a sky diver that's like one of the worst things on the survey, that's my idea there of a little there skydiver going down. So, those things generally have a lot of risk that's associated with it. If on the other hand, you just want to say, sit in a chair, that's my chair, that's not really that risky a behavior, and you'll probably be okay with that. Now when we think about these concepts of risk, what we recognize is that risk will depend a lot upon your situation, how you grew up, how much money you have, and then, potentially, how much money you have will change over a period of time. Basically, you know, if you're really young and you're happy and you're really thrilled about life, you might have a net worth of say, I don't know, $5,000, if a beat up car and a bunch of books and some bookcases you have along, and it's like age 25. And you get to age 65, you might be sitting on a pile of cash and your net worth could be maybe $1 million. You might have different levels of risk aversion, as we're going to talk about the futility of wealth schedules in our next module. So this concludes our mod on risky business. The next module will take about how that relates with the futility of wealth schedule.
