Engineer's Finance

A person will drive in his car for 15 Kms. to buy a DVD Player which was initially priced at Rs.2000 and now being sold at a discounted price of Rs.1200 – he will buy the DVD player that he does NOT want – but is more interested in saving Rs.1000. However, the same person will not purchase a winter coat (that he may really need) available in his neighboring shop for Rs.9000 offering a discount of Rs.800. The problem is with the so-called “Reference Point”. Rs.800 discount on Rs.2000 value looks more in value for something that you don’t need, but the same Rs.800 discount on an item that you definitely need will not look worth on Rs.9000 price. We tend to look at the percentage basis. Rs.800 on Rs.2000 is 40% discount, while Rs.800 on Rs.9000 is only 8.88%. People may already have a DVD player at home, but just because it is offered at a HIGH Reference point discount – they buy it – thinking that they will gift it to someone else or use it later. All that happens is that we end up buying something that we don’t need and avoid buying things that we really need. Continue reading →

Please Read Part I and Part II before reading the conclusion.

Insurance policies are designed taking advantage of this psychological bias – we don’t see the reality, we end up taking our investment decisions on what is presented to us, not what we need or understand. The job is very well done by agents and brokers. They may not be aware of making profit calculations, or in judging whether this policy is good or bad for the customer, but they gradually become experts in taking advantage of psychological biases and mentioning about the circumstances in which we may need a particular policy. Continue reading →

Please Read Part I before starting the second part.

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Let me give you another set of options:

Case B:

Let’s say you own a motorbike which you really love. There is a 25% chance that your motorbike will meet an accident and will require repair cost of 200 Rs, while there is a 75% chance that the motorbike will not suffer any accident. So here are your two choices: Continue reading →

Something Interesting about Insurance Policy. I have always wondered how the Insurance works and I have written previously also many articles regarding the same. This is just to give you a better view of things.

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Let’s discuss some case studies here:

Case A:

Suppose I give you a choice to make of the 2 available options:

1. A bet in which you will surely loose 50 Rs. (100% chance of loss)
2. A bet with 25% chance of Loss of 200 Rs, and 75% chance of Zero Loss

Which one will you choose? Think about it carefully, before making your choice and before reading further.

Some people select choice 1, other select choice 2. What have you selected? Continue reading →