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Do You Buy Extended Warranties?
Stackdump asks: "I am a college student (senior seeking CS BS). I work partime at Best Buy selling computers (arg!). To be truthful I don't really sell computers; I sell what we call 'performance service plans' or PSP's for short. This is the somewhat gimmicky name given to Best Buy's extended warranties. To be fair they do actually provide some service in the store, swapping HDs, CDROMs, and so forth, but most of the hardcore repairs are done elsewhere or by the manufacturer. Prices range from $99 on the cheapest tower to $249 on laptops over $1000. Terms of service are pretty simple everything is covered against power surge, dust contamination, whatever... BUT abuse is not covered: so slam a pencil in your laptop and say byebye, but fry your computer because you don't have a surge protector and you can get a new one. As this is the central pre-occupation of my work day I ask the Slashdot community this: do you feel these warranties are really worth the money?"
No, they aren't worth it. They are a tremendous profit margin for Best Buy, which is why you even get a commission (which you failed to mention) for selling them. The high pressure sales tactics some people employ to push these things thoroughly sours my shopping experience in what should be the equivelant of my toy store. They are much like rebates, they are great for the vendor because people usually don't collect on the value they purchased. It's all a statistical formula at the end of the day. It does appeal to a specific market segment and demand, or else no one would buy them.
Best Buy wouldn't sell these if they didn't make money on them. If they're making money on them they pay out less than they collect. Therefore, over the term of the warranty, you're less likely to receive the money you paid for the warranty back in terms of repair cost than not.
;)
So if it's not a good economic proposition to buy a warranty (insurance), why does anybody do it? Well, on a house or a car, you can't afford to cover the cost of a loss, or a lawsuit (auto liability). If your house burns down, you can't afford to just buy a new house, but if you really could it wouldn't make sense to pay homeowners' insurance because the odds that your house will ever burn down are really low.
With a computer, or a TV you can usually afford to cover the cost of a loss, so, the odds are in your favor to not buy the warranty.
That said, Staples offers a nice warranty - any problems whatsoever and you get a Staples cash card for the original purchase price of the item, no questions asked (I even read the fine print). So, on my $89 Palm I paid $10 for the warranty, since it might malfunction by time I need to upgrade.
My God, it's Full of Source!
OUTSIDE_IP=$(dig +short my.ip @outsideip.net)
I almost bought one on a digital camcorder, particularly because the saleskid said it would be covered if it got dropped, got wet, etc. But when I read the policy before checking out, almost everything he said was wrong. Almost nothing was covered. Now I never buy them.
After removing a crayon wedged in his brain, Homer finds himself a genius. A miserable genius. He goes to Moe(moonlighting as a surgeon) to replace the crayon.
... ... [taps once more]
Moe: So what do you want here, uh, appendectomy, lipo, or
the sampler. That's very popular.
Homer: [holds up a blue crayon] I want you to stick this crayon
into my brain.
Moe: No problem -- the ol' Crayola oblongata.
Moe: All right, tell me when I hit the sweet spot.
Homer: Deeper, you pusillanimous pilsner pusher!
Moe: All right, all right. [with a small hammer and chisel,
taps the crayon further up Homer's nose]
Homer: De-fense! [woof-woof] De-fense! [woof-woof]
Moe: Eh, that's pretty dumb. But, uh
Homer: Extended warranty? How can I lose?
Moe: Perfect.
-- Simpsons episode "HOMR" BABF22
So insurance is a gamble, right? You bet some money that you're going to get hurt or your stuff will break or your house will burn down, and if you're right you get a big payout. But in traditional economic terms, the odds are against you, because the insurance company chose your premium specifically for that reason. But it can still be reasonable to buy insurance. Here's why:
It all boils down to the fact that the utility of money is not linear. My (hypothetical) millionth dollar is worth less to me than my hundredth. That hundredth dollar is less important than my last dollar.
So paying $10 to elimiate a 1/1500 risk of losing $10,000 doesn't make sense if you have a million bucks (since you can afford to play the odds and accumulate enough samples to make the expected averages show up), but if you have $8,000 it's a whole nother ball game; one 'loss' and you're fucked. The insurance providers have pockets deep enough to play the odds, and as a result it's profitable for them; if it weren't they would raise the premiums until it was. It's economical for them to cover risks you can't afford precisely because they have a fuckload more money than you do. So when you're talking about losing your last dollar, to them it's just another dollar and paying it out to you doesn't hurt them any more than any other dollar.
So what does this mean? Insurance on small items, that you can afford to replace, such as (hopefully) consumer electronics, is probably not worth it. Situations where 'losing' would constitute a larger percentage of your net worth (cars, homes, personal medical fees, liability for hurting other persons) are where insuarance can be quite reasonable, despite what an erroneously linear risk v. reward calculation might suggest.
Basically when considering insurance ask yourself "what happens if I need the insurance and don't have it?" If the answer is something like "I'm out $250" instead of "I'm fucked" you probably don't need the insurance / extended warranty. If it DOES make sense for you to buy the extended warranty on some consumer electronics, that probably means you're buying something you can't really afford, and you should reconsider the original purchase, not pay extra.
Trees can't go dancing
So do them a big favor
Pretend dancing stinks!