Variance

 

It Ain’t The Meat It’s The Motion

It ain't the meat, it's the motion
Makes your daddy wanna rock
It ain't the meat, it's the motion
It's the movement that gives it the sock

And it ain’t the average, it’s the variance.

“The Possible Collapse of the U.S. Home Insurance System
The Daily ( a NY Times Podcast)

Across the United States, more frequent extreme weather is starting to cause the home insurance market to buckle, even for those who have paid their premiums dutifully year after year. Christopher Flavelle, a climate reporter, discusses a Times investigation into one of the most consequential effects of the changes.

Listen on Apple Podcasts: https://podcasts.apple.com/us/podcast/the-daily/id1200361736?i=1000655653194”

In the climate change crisis, much attention has been given to the increase in AVERAGE global temperatures. That will certainly impact the most vulnerable areas. But since weather is a random event, it depends on two parameters: the location, which corresponds to the average; and the VARIANCE, the range of those random events. It is the variance that is at the heart of the insurance industry. Insurance is a means to deal with the unlucky by using insurance payments from many to pay the claims of the very unlucky. But as the variance increases, the proportion of wealth of the very unlucky increases and this affects everyone, not just the very unlucky. If the variance becomes too extreme, and it has, the insurance system may collapse, which is the subject of the podcast above. While the effects of Climate Change, and the effects of sea rise from average temperature rise, may impact only those in coastal areas,  if the variance also increases, then it impacts everyone, including those NOT in coastal areas.

The increase in variance is also why reducing government expenditures as close to zero as possible may NOT be wise in a growing economy. By fixing the average starting wealth as close to zero as possible, if there is any growth, then the variance must increase to capture this growth. But variance increases for the unlucky too, not just for the lucky.  A foolish fixation on NOT keeping the variance the same when the economy grows and instead increasing the Universal Basic Expenditure for all, requires that more of the growth be distributed to the lucky. But increasing the variance in this manner, also increases the number of the unlucky. By pretending that is a zero-sum game in an increasing economy, a decrease in the share of income of losers will be balanced by the share of income going to the winners. This was discussed in a previous post. https://dbeagan.blogspot.com/2023/09/distribution-of-income-ii.html

There is a joke among statisticians that is intended to illustrate variance. A good variance is one where your head is the same temperature as your feet, in which case your body has the same average temperature. You might have the same average temperature if your head is in an oven and your feet are in a freezer. In the latter case the variance is much, much greater, even if the average is the same and your situation is much worse.  IOW, it ain't the average, it's the variance.