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Case study: Console Insurance

11 Post author: gwern 05 March 2011 02:11AM

I've sometimes seen people say that they need concrete simple examples of ideas like expected utility and Bayes' theorem. So, continuing in the same vein as An Abortion Dialogue and Case Study: Melatonin, I recently polished up my shorter-but-hopefully-still-interesting article on Console Insurance.

It's basically a short discussion of how back of the envelop estimates show console insurance (and by extension, most warranty extensions) to be a bad investment.

Comments (7)

Comment author: David_Gerard 05 March 2011 10:48:53AM *  2 points [-]

The only extended warranty I've ever thought was a good deal was the one Fujifilm offered on my F20. Which is a great little camera that isn't made any more but, along with the similar F30 and F31, sells on eBay for more than the original new price (~£100-150). The really good thing about this warranty? Unlike every other digital camera warranty anywhere, it covered liquid damage! For £12/year!

(The camera has since been accidentally ruined by the older teenager, who got something jammed in the zoom lens barrel. I have the F70, the ostensible successor to the F20/F30/F31 series, but it's really not very good at all. Need a compact with ridiculously high ISO that is at least as nice.)

Note that statutory warranties (of fitness for purpose) are much better in the UK and Europe than in the US. This particularly applies to anything bought mail order. But the shops (particularly the Dixons Group) still try to sell you a near-useless shop extended warranty.

Consumer goods are all disposable, and especially electronics. This is why I've always experienced terrible unwillingness to spend more than £100 on a computer - I think of computers as things employers buy and depreciate quickly.

Edit: And just nabbed an F30 on eBay for £90.50 inc post. w00t!

Comment author: gwern 06 March 2011 11:42:01PM 0 points [-]

Note that statutory warranties (of fitness for purpose) are much better in the UK and Europe than in the US. This particularly applies to anything bought mail order. But the shops (particularly the Dixons Group) still try to sell you a near-useless shop extended warranty.

That sounds interesting. How much more are the warranties worth, do you think? My little essay is necessarily biased by my US perspective; maybe the point is even stronger for you foreigner-types.

Comment author: David_Gerard 07 March 2011 04:07:54PM *  -1 points [-]

I don't know of a comparison between US and UK. I do know that if you've been messed around and the shop won't make good on it, Trading Standards have a fine selection of very effective LARTs, and if you bought something mail-order the distance selling laws kick in as well, which are remarkably consumer-favouring. The consumer can, with sufficient persistence, apply the fine British bloodsport of bureaucracy to a satisfactory conclusion.

Extended warranties sold by the shop are pretty much useless - if the offered warranty is a year and it breaks in 366 days, you will have an at least arguable legal case that the device was not quite fit for purpose (YMMV, be prepared to put it quite a bit of effort). Extended warranties sold by the manufacturer if they do repairs in the country may not be useless. Be very sceptical of such offers in general.

Comment author: David_Gerard 05 March 2011 10:51:46AM 1 point [-]

Oh, and case studies of practical application are great stuff. Keep it up!

Comment author: Chala 22 March 2011 11:33:15PM *  0 points [-]

I write in response to your introductory paragraphs.

Interestingly, most insurance companies give out more money in claims than they take in in premiums - this being a cost of doing business that must be paid for the privilege of holding the "float", being the money held by the insurer which has not yet been paid out as claims. This money is held in some form of investment, often dominated by government bonds, which produce a yield small relative to the float - but large compared to the capital invested in the company as the float should be much greater.

Thus, for an average cost which is slightly less than the yield one would get on their invested premiums the risks of a catastrophe are sold. I would generally refer to that as "fair" as you put it, though I would prefer to avoid the pitfalls of such a subjective term, and I would agree that extended warranties are an "unfair" method of abusing consumer ignorance.

Comment author: jimrandomh 05 March 2011 02:54:47PM 0 points [-]

Insurance offers good salesmen the opportunity to take money from those who are too weak or manipulable to say no, even to things they know are bad deals. I don't think many people buy console insurance because they actually believe it's worthwhile.

Comment author: CronoDAS 05 March 2011 03:50:04AM *  0 points [-]

I think GameStop offers a somewhat better offer, giving you a replacement even if it's your fault the console was damaged.

And yeah, the buyback program does sound like a ripoff in general; if it applied to movies or video games, it might be worth something, but, looking at the web page for the buyback program, it seems to me that most covered products aren't the kinds of things you'd normally want to return after six months.