Expected utility

Risk aversion is an important thing.... The example of warranties... From washingtonpost

"All you have to do is see how aggressively these things are sold at the point of sale," said Jean Ann Fox, director of consumer protection for the Consumer Federation of America, a District-based nonprofit association of 300 consumer groups. "It's not a good buy under most circumstances."
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The instinct to protect what we have and forgo the obvious benefits of another course is one long studied by behavioral economists. Kevin McCabe, an economist and director of the Center for the Study of Neuroeconomics at George Mason University, said that even without knowing from experience that a product will break, many people insure it anyway.
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That reliance on gut instinct points to an inherent disadvantage for consumers in the purchase process, economists and consumer advocates say. Buying an extended warranty is vastly different from selecting most other insurance products. When buying car insurance, for instance, it's relatively easy to make an informed decision by comparing terms and prices among different carriers. The power struggle between buyer and seller is relatively balanced.

But when deciding whether to buy an extended warranty, it is nearly impossible to comparison shop from the checkout counter. And, because the insurance and service companies are invisible at the time of sale, consumers can't verify their financial health or reliability.

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Warranty Week, an industry publication, last year estimated that of the $15 billion in premiums charged consumers in 2004, $7.5 billion went straight into the pockets of the stores that sell warranties as their cut.

Of the remaining $7.5 billion, the publication estimated that $3 billion was paid in claims by the insurance companies that back the plans. On the other hand, according to the Insurance Information Institute in 2004, the U.S. auto insurance industry paid out $66 in claims for every $100 in premiums.

Neither Circuit City nor Best Buy discloses how much of its bottom line comes from extended warranty sales. But analysts have estimated that at least 50 percent and in some lean years 100 percent of profits at the electronics retailers come from extended warranty sales.

so where is the value:

But even Consumer Reports has made a few exceptions. Last year, for the first time, the magazine found that repairs on some products -- laptop PCs, treadmills and plasma TV sets -- were common enough and expensive enough that a decently priced extended warranty would make sense. Plasma televisions, the magazine said, run hot and are still considered a relatively new consumer technology.

Plus, dragging bulky, large-screen televisions into a repair shop is impractical for most consumers. Many extended service warranty programs offer in-home repairs.