Everyone knows you're supposed to have an emergency fund — or are you?
"People are willing to pay much more for insurance than expected value — which is how insurance companies cover their costs and make their profits. Here again, people buy more than protection against an unlikely disaster; they eliminate a worry and purchase peace of mind."
What happens if the wager was $1,000? The odds haven't changed at all, but the potential loss has, and when the potential loss is big we become risk averse. It's the reason people pay more for insurance than it's worth, and waste money on appliance protection plans. Maybe having a mountain of cash helps you sleep at night. That's fine. However, if the money was invested in the stock market where the average return for allDoesn't that difference of $375,000 seem like an enormous price to pay?
Look, the downside risk of a big unexpected expense is fairly small, and the potential upside from investing is fairly big. It will always be tempting to imagine the worst possible scenarios and how financially painful they'd be, but the worst thing is probably losing your job and needing to liquidate some investments.
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