And I mentioned contents insurance, but whatever the example, it's simply cost vs risk.
Actually they are (at least) three different scenarios:
* non-catastrophic risks that can be insured against - such as mobile phone insurance, extended warranties, and so on, on average it will be cheaper not to pay for the coverage and if the worst did happen (the phone got stolen) you could afford to cover the cost. On a purely average financial basis the insurance inevitably has a net cost, but people might be happy to pay that, e.g., 'On average mobile phone insurance spread across all users has a net cost (net of replacement phone costs) of £60/year, however I am happy to pay that £60 because in the event that my phone is lost or stolen I would feel very bad
* catastrophic risks that can be insured against - public liability with car accidents, medical care while on holiday, house being destroyed by fire, and so on - as with all other insurance, on average these policies have a net cost, but whereas you can buy a new phone for £5 (a basic one!), a $1 million medical bill would be ruinous to most people. Here you are paying a fee, in effect, to shift the liability for an event to someone who can afford it better than you (an example of this is that amateur golf tournaments are able to offer large prizes for a hole-in-one by means of a payment to an insurance company; for the insurance company insuring numerous such events, the premiums will be profitable, and for the golf course the premium is worth it because they probably could not afford to pay the prize in the rare event that their was a winner)
* flexibility on train tickets - here there is no specific premium being charged in the sense that you pay x% more for a flexible ticket rather than an advance, the price difference is essentially arbitrary, and in no sense related to the relative cost of an advance as opposed to flexible passenger (whereas a genuine insurance premium, in a competitive market, will be charged based on the insurer's model of the expected average cost of a new policy, plus a markup). There are many things to weigh up:
- the risk of missing the booked train (this is a %, hence £2 off a £10 ticket is much more significant than £2 off a £50 ticket)
- the cost of a replacement ticket if you did miss the train, e.g., if you book two Advances at a few quid less than an off-peak return but the only replacement ticket if you missed the return was a single costing 10p less than the off-peak return - multiply by the above, e.g., 5% * £50 = £2.50
- the chance of a change in plans (again a %, but also you need to figure out how much you would pay (in £) to be able to change your plans) - e.g., you would pay £5 and there's a 10% chance of change in plans = £5 * 10% = 50p
- the desired premium to buy a ticket in advance, e.g., to book in Advance you must faff around printing things off and this might take you 10 minutes. In addition, because of the risk of missing a train you would also leave 10 minutes earlier (in places where trains run only every 2 hours this might not be relevant, since the annoyance factor of missing a train in that case should ensure you arrive on time), so you might say you want £2 for this.
- possibly (depends on the individual) a further risk premium depending on whether you value to the certainty of a flexible, refundable ticket above a non-flexible, non-refundable advance (cf. the mobile phone insurance example - we are happy to pay £x more for peace of mind); this risk premium would be based on our perceived likelihood of Advance ticket troubles
You would take the cost of the flexible ticket, say £50, and then take the above off:
£50 -
£2 Advance annoyance premium
- 10% risk of missing the train and paying £50 = £5
- 10% chance of changing mind and wanting to stay in the pub longer (happy to pay £5) = 50p
- (optional) £2.50 Advance risk premium
giving a ceiling for Advance price of £40 on a £50 ticket.
Obviously all the numbers are completely arbitrary and it's not to say that you shouldn't pay more than £40 Advance for a £50 walk-up ticket, and there will be scenarios where Advances make more sense at higher prices, and scenarios where they make less sense, it does however show the process, and illustrates hopefully that £2 off a £10 ticket is more significant than £2 off a £100 ticket.
Well, £2 saving per trip, £104 saving over the year, I'd say the example is more like once a week, but, in any case, if the Advance is £2 cheaper than the cheapest flexible option on each trip then the point is the same.
Well no, the point is that any of us who has done a weekly trip for a long period can probably point to problems in that time, so the £2 saving is not accurate, it's like saying that if you cover 34 numbers on the roulette wheel with £1 then you win £2 each time, well yes you do, but when your numbers don't come up, you lose £34, and in the long run if you continued playing roulette, it is a mathematical certainty that you will lose all your money.
Exactly, and OLJR obviously feels that the chance is slim enough that the saving is worth it, even if it is only a small amount. People like that shouldn't be considered 'not sane' because they make that choice.
Indeed. However these fares do not appear to be in the customer's interests overall, given for instance that the return was only a small % more than the Advance, and we have got to assume that a high proportion of people buying tickets are not experts and do not understand the rules, and therefore they will work out worse off, net, for the sake of a small saving.
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