How to write a referee report

Seriously cribbed from A Guide for the Young Economist.  This is how the majority (though not all) of economists do it, and when I’ve reviewed for other fields I’ve been complimented on the organization, so I don’t think you can go wrong using this format even if you’re not an economist.

The letter to the authors

Start with a paragraph called “Summary”.  There’s some disagreement if these are still needed or just waste time, but I think if you do the summary paragraph right, it can be useful to both the editor and the authors.  The summary should NOT just be a restatement of the abstract.  It should be a summary of what the actual paper is about, and not what the authors think it’s about.  So, for example, if it’s an experiment, you would have a sentence saying what you think the authors are trying to do (Ex. The authors explore the effect of salt water vs. fresh water on underwater basket weaving.)  Then you say briefly what they actually did.  (The authors did a randomized controlled experiment using a student population in which…)  You might end with a statement about how they extrapolate their claims to a broader issue.  Often the abstract doesn’t actually fit what the paper is about– it makes much larger claims about what happened.  The summary should be neutral and describe what the authors actually did.  This is helpful to the editor to know what the paper is actually about before they read through it, and helpful to the authors in case what your understanding of the paper is about is different than what they intended.  They can fix their writing to make the paper more clear.  I find it helpful to focus on the method section and tables only for this part.

Then create three sections:

Major:

Minor:

Minutia:

Major should include things that you think must be fixed before the paper is published.  If the paper is a reject, then this is where reasons for rejection would go.  If the paper is an R&R, these are the items that must be addressed for sure.

Minor:  This is where smaller questions go.  You might have things that need clarification, things that are incorrect, additional robustness checks that are not make-or-break but should be addressed, and so on.  It is helpful to include page numbers with these.

Minutia:  This is where all the typos, page proofing, etc. stuff should go.  You’re recognizing that they’re small mistakes that the authors will want to fix, but that they’re not big deals.  These definitely need page numbers.  (If one of your recommendations is “spellcheck” because there are multiple spelling problems, I would put that under minor, as opposed to saying “should it be here instead of hear on the first sentence of page 28?” which would be a minutia, but YMMV.)

Always be polite in your referee report, even if the paper is ridiculous.  Do not make a reject/R&R recommendation within the paper.  (Also:  as an editor I can say for certain that positive letters don’t always lead to R&R recommendations and negative letters don’t always mean the person recommended reject.  It’s insane how some people can say different things depending on the audience.)

Advice is generally that you do not have to spend as much time on reject papers as you do on R&R– some people will say just stating the major points is enough if you plan to reject.  As a reviewer I generally try to give advice for making the paper better should it go to another journal or should the editor disagree with my assessment, but sometimes a paper is just not publishable so it doesn’t matter if they never fix the typo in footnote 17 even if I found it.  I’ve found editing at a lower tier journal that reviewers tend to over recommend revise and resubmit (they’ll be like, “the paper says that correlation is causation, but if they could only get at causation, this would be a great paper, R&R”), and the explanations people give me are much more important than their actual recommendations.  My colleague who edits at a top journal says reviewers over reject (“this is the best paper I’ve ever read, Reject”), so the explanations are important.  When I was editing a top field journal, reviewers tended to get it “right” on average.

The letter to the editor

You will also generally have a letter to the editor.  I find the best editors letters provide a concise summary of the letter to the authors and possibly elaborate on the context of your comments– Basically reiterate the major points that led to your decision of reject, or explain what must be fixed before publishing.  If you don’t have much to say because it’s an obvious accept, use this space to fight for the paper.  You don’t have to be anonymous in the letter to the editor, so you can say more things that put it into context or explain what you’re not sure about because it’s not your area of expertise or what you are sure about because you are an expert.  If you’re not sure if it should be R&R or Reject, here is a good place to say so and explain why– what are the pros and cons?  These pros and cons should also be in your letter to the authors, but you can provide more context in your letter to the editor.  You can also put disclaimers in the letter to the editor like, “I didn’t realize when I accepted this paper that it was written by a former coauthor” or “I reviewed this paper for a top journal earlier and recommended it be sent to this journal instead.” Some dudes who read this blog think that there should never be anything said to the editor that isn’t in the letter to the authors, but I strongly disagree.  I appreciate the reiteration of the major points of the review (especially since some people don’t use must be fixed as their delineation between major and minor sections, but instead use difficulty of fixing etc.) and any context that I should know about (and I really don’t need to know about that typo on footnote 17 unless the paper is a revise and resubmit, but not everybody keeps those things to the minutia section).

Special topic:  Top journals

For top journals (for which I have not yet been an editor but have done a lot of reviewing), you may want to keep in mind the following points:

1. Is it clean/well-done?  (This is the bare minimum)
2. Is it Novel? (Doesn’t always have to be, but it helps a lot… though you can’t be too novel or it gets rejected because it’s “not economics” even if it actually is.  grrrr.)
3. Does it make a major theoretical and/or empirical contribution to the field?  (Sometimes papers don’t need to add to empirics, but they do need to have a theory base even if not literally a theoretical model.)
4. Is it Important/ of general interest? (This is highly subjective and where many of my papers strike out because it turns out they’re ahead of their time.  grrr.)

Update:  Here’s xykademiqz on the same topic for her science field.

Do you do a lot of referee reports?  How does your field handle them?

Ask the grumpies: Should economists not teach anything about race?

SLAC prof asks:

In a tweet, Trevon Logan says

Message to 99.7% of Econ professors: This coming academic year, do NOT attempt to teach about race, racism, or racial inequality. Just don’t. Even if you’ve published papers on it. Respect this as a body of knowledge and refer students to appropriate academic units.

— Trevon D Logan (@TrevonDLogan) June 21, 2020

The whole thread has more information.  It makes me want to give up.  He says economists do race all wrong.  What do you think?  And what does one need to do/know to be qualified to teach about race?

Ok, so first off:  I am not black.  Also I know and hugely respect Trevon Logan and his work (and I’m fairly sure we referee each other’s papers and I’ve always been impressed with his!)

But I disagree with him.  I think this is ok for two main reasons:

First, I have had a relatively large number of black (mostly female) students, many of whom have taken some of these cross-campus classes he discusses, and they have always asked me for more on race, not less.  You just cannot teach health economics without discussing disparities (and many of the big papers in this area are from epidemiologists and demographers, not economists).  You cannot teach labor economics without having a huge section on discrimination, and while many of the white male economists working in this area have blinders on, it is fairly easy (if you have been listening to people, or if you’re female/minority) to point that out and modify their theories into something more realistic and less bigoted.  Like, of course taste-based discrimination exists, we don’t have competitive markets, duh.  (And current US events during my last semester’s class made it very clear that discrimination can lead to monopoly power, not just be a consequence of it.)  Theories of statistical discrimination should include incorrect stereotypes because we don’t have perfect information, honest to FSM.  Your (not privileged white male) students can generally point out these flaws themselves just using their own experiences and common sense.  You cannot teach public finance without talking about the political economy of race and how these programs affect different groups.  Heck, Political Economy is less than half a class without discussing race.  Similarly, Law and Economics (even if you’re planning on limiting to patents and contract law, race is still a factor!).  Sports economics!  You just cannot do justice to any subject that affects money or people without discussing how race impacts it.  So I include these topics and every year my students have more ideas for things to add.  (Like yes, in health economics we do need to talk about how white doctors have used black women’s bodies and DNA without their permission, you are absolutely right.  That would be a great addition to the Tuskeegee paper we already discuss.)

Second, I have listened to the troubles of our young black female faculty across campus (I was on a university-level thing to improve things, which we sort of did but also mostly didn’t … in any case, we did a lot of listening in addition to convincing the university to allow salary equity bumps and a few other things) who primarily teach these classes that Dr. Logan is suggesting we send our econ majors to.  It is really unfair to them to inundate them with mostly white male econ majors who have been taught that it’s just fine to play devil’s advocate and haven’t really examined their implicit biases at all.  I have enough trouble breaking them in in my intro stats classes.  Can you imagine how disruptive they would be in a discussion based class with women and minorities from what they consider to be lesser majors?  That is going to have huge negative spillovers.

I have other reasons to disagree which may be less ok, and I would modify his advice some.  (Note that since I wrote this post– several other people in the comments of the twitter thread have made these or similar suggestions.)

First off, I agree with him 100% that most of the white dudes in econ who gatekeep and work on racial discrimination start from racist assumptions and for many of them, their main goal is to show how it is Black people’s fault (or women’s fault etc.) for not being more like White men.  It’s only recently that economics has started thinking that no, maybe Black people and women are rational, they’re just playing a different game.  This problem can easily be solved by just saying, “Don’t teach any papers on race by white men (or by Roland Fryer who may be black but has serious issues).”  You can even modify this advice to “Teach only papers on race by black scholars (except not Roland Fryer).”  There’s plenty of great work by black scholars and some by other minorities and women that don’t start with racist assumptions or trying to bend evidence to “prove” racist ideas.  There are even textbooks and summary articles that would be great for lower-level undergraduate classes (William Darity Jr. is a good author/editor to start with).

And there are a LOT of white economists who could themselves benefit from reading this work.  Maybe they should start with So you want to talk about race and/or White Fragility and following Black scholars on twitter.  Then they can move on to articles in academic journals.

In terms of whether or not economists think about discrimination incorrectly… some of them do, but I think we benefit from looking at how different social sciences deal with race and discrimination.  NONE of them give a complete picture.  The assumptions and questions asked are different.  We gain tremendously from thinking about these different viewpoints and different ways of modeling.  (I took Race and the Economy from an amazing Black woman and she incorporated overviews from other fields in the class.  It can be done.)  I could go into huge detail about this, but that would get too long… suffice to say that these different viewpoints complement each other; they are not substitutes.  An economist can learn a lot from how anthropology, sociology, psychology and other fields conceptualize discrimination and other questions involving race.  (Insert rant about irritating white male gate-keepers in labor economics here who think innovation and interdisciplinarity is incorrect.)

Maybe the better advice would be for economist professors themselves to take a few classes across campus, or at the very least, read a textbook from another field, before adding race to their classes.  They should also read up on how to make their classroom more inclusive so that students don’t feel scared to speak up when the professor screws up.

As for me, I have been including race in my classes since I started and I cannot imagine stopping now.  The more I teach, the more I listen to my students, and the more I learn from them, which helps students the next time I teach.  It is a learning process for everybody.  Did I have some cringeworthy moments when I first started, probably, but minority students have been gentle with me and each year I’ve learned more and gotten better and future students benefit from that.

Update:  The more I talk with my colleagues interested in adding a race unit in their classes, the more I’m convinced that my suggestion about only using papers written by minorities is the correct one.  I had no idea that people didn’t know Becker was a huge racist misogynist jerk(!)  I mean, I thought everybody knew that.  People knew it back when he was still young, like decades ago.  So no, DO NOT read Becker in the raw original.  Many of his theory structures are lovely, but read them with the sexist and racist assumptions removed by someone else; there are great minority scholars who have explained the baseline theories and added to them, so go with them.  (William Spriggs talks about some of the problems still inherent today.)

I swear, my colleagues are all going to give up and just end up covering Bertrand and Mullainathan, though I did convince one to try Quillian et al. (in PNAS) instead.  Look, it’s not that B&M isn’t a great paper, it is, but the really horrible overlying thing is that it got into the AER because everybody, including labor economists who should have known better, thought this was the first time a correspondence audit had been done, completely ignoring ALL of the correspondence audits done by Black scholars or non-Americans– I learned about them in my undergrad economics class on Race in the economy.  What I mean is, I’m fairly sure that racism is the reason those earlier audits by black people aren’t known at all.  Quillian and coauthors do a good job of collecting them and plotting their results over time.  (It should have been published in Science, but the racist editor overruled like 7 referees who all said it was must publish.)  Quillian is also white, but he’s a sociologist, so maybe he gets a pass?  Plus he’s very nice.  I’m not sure if there are any minorities in the “et al” portion.  (Plus the econometrics textbook we use has B&M as one of their datasets and students replicate all the ttests and regressions, so it’s not adding that much for our majors.)  Any time I explain this to a White labor economist they get really mad at me because B&M is somehow the first hardcore proof they’ve ever seen about racism against black people other than those small scale in-person audits from like the 70s that somehow Jim Heckman “disproved”  in the 1990s (spoiler:  he didn’t really).

Update 2:  Last night we talked to a number of students and alumni (mostly underrepresented minorities) and they said to be careful to make sure that the lesson is integrated into the curriculum, and to not just have it as a separate unit unconnected with the rest of the class.

Ask the grumpies: Bang for the buck with stimulus funds

Becca asks:

What are you doing with stimulus funds? Do economists know which kinds of ways to spend it will ripple the furthest?

The very short answer is that economists don’t get stimulus funds (they earn too much).

Right now donating to food banks is probably the best bet because getting people fed has huge beneficial effects on everything that creates or costs.  Basically anything that helps kids will have bigger bang for the buck than things that help adults (There’s a really interesting not technically meta-analysis, but colloquially meta-analysis, on this by Nate Hendricks and Raj Chetty and someone else, I think, but basically programs to help kids help the economy in the short and long term by more than anything else).  Feeding people makes them more productive, less hangry, helps their mental facilities, decreases their stress, increases their growth etc. etc.  There’s a reason it’s near the base of the hierarchy of needs.  An email I just got says that “40% of households are reporting moderate to high levels of food insecurity and 20% of children are experiencing food insecurity.”  Many food banks (at least those in the Feeding America network, according to an employee who gave a guest lecture in one of my classes a few years back) also have access to the wholesale food markets, meaning that all that food that isn’t getting bought by restaurants can be distributed to foodbanks from the larger networks.  Money to grease those wheels can do a lot of good.  (Here’s a webinar.)

Also (less mainstream economics opinion now): activism is going to have a huge impact over the next year—if we lose the post office, if they don’t take steps to make outside safer, if they re-elect Trump, all of this will have lasting impacts on the economy for generations.  So… call your congresspeople about the post office.  Buy some post-cards and stamps or printer paper and stamps and do post-cards to voters or letters to voters.

In terms of buying things that you want and not just giving money away?  That’s harder… I mean, oil prices are down, but long-term we don’t really want more driving because climate change is bad for the economy long-term.  Stick to buying from small shops not through amazon or places like instacart or grubhub.  We want to decrease the monopoly power of these companies– competition is a good thing.   I have been using amazon as the last resort these days even if it takes longer to get things elsewhere.

What are you doing with stimulus funds?  

Not all electricity is the same

California’s new law requiring solar panels in new residential builds has just gone into place.  That’s pretty cool– I’m hoping that the resultant increase in demand will cause technology improvements that will make solar worth it for my house by the time we need a new roof.

California already has cleaner energy which means it’s a great place to drive an electric car.

But not every state gets a lot of energy from renewables and (not great but still) relatively cleaner forms of energy generation such as nuclear power or natural gas.  Some still have electricity generation that may be dirtier than the same amount required to fuel a gasoline-powered hybrid car.  In these places, it’s better for the environment to buy a hybrid than to buy an electric vehicle.

Here’s an article from 2015 that describes this situation in more detail.

And here’s a nifty NYTimes article from 2018 that shows where your state gets the majority of its energy (or at least where it did back in 2017):

The US government also has a tool that’s hopefully more up-to-date (but actually looks like it’s still using 2017 data) that provides a ton of information on energy generation and consumption by state.  You can see why CA is a great place for electric cars, but say, West Virginia should stick to hybrids.

What kind of electricity do you have?  Has this influenced your decision about what kind of car to buy?

 

Ask the grumpies: How to subvert the Tragedy of the Commons

Leah asks:

Is there any way to subvert the tragedy of the commons, or are we doomed to that fate? I seem to remember learning some examples way back when I took environmental economics but they all escape me . . .

I just happen to teach a class on this!

The first way we learn about is with government setting property rights and facilitating costless Coasian bargaining.  In the canonical example, there’s a river and a factory and a fisherperson.  The factory pollutes the river which kills some fish.  If the factory owner owns the river, then the fisher can pay it to pollute less.  If the fisher owns the river, then the factory owner can pay them to allow some pollution.  There’s problems with this solution when there’s not costless bargaining, when there’s multiple fishers (that can cause a holdout problem) or multiple factory owners (and they don’t know which ones are causing the pollution), but that’s the “preferred” government intervention when it works because it leads to the least amount of deadweight loss.

Fancier versions of this solution include things like the government setting a specific number of pollution credits and allowing firms to bargain over them.  That’s the idea behind Cap and Trade.

When the Coasian solution is difficult to implement, generally because of bargaining problems or informational aysmmetry, the government can step in a bigger way.

First:  The government can mandate that firms not be allowed to pollute more than a certain amount or fish more than a certain amount or hunt more than a certain amount.  Associations can also take the role of government in order to say, prevent over-fishing, though it’s often harder for a non governmental association to enforce these kinds of mandates.  Mandates are most enforceable when there’s jailtime associated (not just a shell company going bankrupt), though that tends to be unpopular.

Second:  The government can tax things like pollution or things that cause pollution.  Think gasoline taxes or hunting fees.

Third:  The government can subsidize companies to not pollute or to not fish etc.  This option tends to be the most popular with industry.

All of these methods have situations in which they work better or worse than the other solutions.  With nuclear waste, you want a mandate because even a little bit of waste is bad.  With air pollution you might want a tax or subsidy or cap and trade system.  The government can make money with taxes or by selling property rights in a Coasian situation.  Companies tend to lobby for subsidies which makes them more politically feasible.

So the short answer is:  yes, government can subvert the tragedy of the commons.  Market failure is why there is an economic role for government and the tragedy of the commons is one of the causes of a main source of market failure (negative spillovers).  But we need political will for it to work.

Ask the grumpies: Which is more important: Macro or Micro?

Leah asks:

Which is more important, macro or micro economics?

For most people, microeconomics is more important.  Both, however, are very important for the government, particularly the federal government.

Macroeconomics tells us about whether there should be a Fed, how should we peg the monetary system (if we should), when should the government spend and when should it pay back debt, how can the government lower unemployment and inflation using monetary policy, and so on.

Microeconomics tells us everything else.  How do we best invest in kids?  How to firms set prices?  How do we help marginalized groups?  How much should people save for retirement?  How do we best finance schools?  And on and on and on…

So… both are incredibly important, but there are a lot more microeconomists out there.

Ask the grumpies: How to address the affordable housing crisis in expensive cities

Yet another pf blog asks:

What policies do you think are best to address the affordable housing crisis in expensive cities?

Definitely not rent control!  I cannot tell you how many lectures I’ve suppressed on this topic when being a tourist.  (Instead I say, “Sorry!  I’m registered to vote in another state and cannot sign your petition.”)

The big answer is:  Loosen up zoning to allow more high-rise apartment buildings to be built.  It is as simple as that, so long as you make sure that the developers and additional taxes contribute to the additional pressure on local public goods.  But there are a lot of SF suburbs that only allow 2 or 3 stories to be built.  The second big answer is reliable public transportation (my favorite is light rail, but commuter rail and buses with special highway lane access are also good) to places outside that have affordable housing so people can commute to work.  Even our best subway and elevated systems could use expansion in terms of number of trains, number of lines, and just plain maintenance.

Ask the grumpies: Macro 101– why can the US have so much debt?

First Gen American asks:

I don’t get the deficit and printing money in general. Why is the US able to be in such enormous debt and continue to grow it without short term negatives consequences aside from servicing the debt. I just read that something like 70% of foreign countries still use USD as their reserve currency Despite President Obama adding something like 7 trillion to the deficit during his 2 terms and Trump is continuing the spending spree with tax cuts. There are a number of articles in this question and I figured as economics people you may have more of a clue.

At some point it’s not sustainable. Does anyone even know where that cliff is? Does anyone care? Is there a real risk of economic collapse at some point?

The short answer is:  We’re ok so long as enough folks believe we will not renege on our promises.

Longer answer:  We’re ok so long as there’s still decent GDP growth.  We’re better off if that spending is investing in our future and worse off if it’s contributing to widening income inequality.  (This was one reason I loved HRC– she really got that.  Spend on investment.)

Let’s see if I can find a good longer answer somewhere online.  There must be a wikipedia page or something… This investopedia article seems reasonable, laying out all the different arguments.

Basically, some debt is good because it contributes to investment so long as the rest of the world believes in the continued existence of the US as a country (and not one that will refuse to pay).  Too much debt can cause problems.

Here’s a planet money podcast that doesn’t go into too much detail, but is somewhat interesting.

How to talk about how awesome your work is without sounding like a jerk (in an academic paper)

Being a woman, and a woman not at a top 10 institution, in a field in which there is little to no double-blind reviewing, I have to walk a very fine line when promoting what is novel and new about my work compared to previous work.  This is especially hard because I do really innovative work that ends up getting cited a lot and taught in classes but faces a huge amount of push-back from the people who don’t think that way.  (When I put it like that, maybe I’m not the best person for giving advice given my lack of top general interest journal publications.)

Anyway, don’t say that you’re the first person to do something unless you’re an asshole at a top school.  They are always wrong.  They have always not done enough literature review.  But that doesn’t kill them whereas it is the death knell for the rest of us.  Don’t do it.  (I review a lot of papers and see this dichotomy in action– asshole reviewers are so pleased to bring their work to the attention of the famous white dudes, but are insulted that junior scholars should not know their important paper published 30+ years ago.)

When you’re an asshole at a top school, a good strategy is to do an extremely light literature that only cites top general interest journals.  That makes it look like your paper is new and innovative.  And people believe it is because your work doesn’t get sent out to the other people (women, junior scholars, people not at top 10 schools) who have worked on the same question because the editor doesn’t know they worked on it and you didn’t cite them, so how is the editor supposed to know.  Yes I am still really bitter about this.

When you’re not that asshole, you have to do a really complete literature review because if you don’t cite someone, the reviewers take offense and think you haven’t done a thorough lit review.  You can get away with not citing things that aren’t in your field (but I cite people outside anyway because they do work I think economists should know about– this is part of why my way of thinking about things is so innovative– innovation in economics is what another field discovered 30-50 years ago…).  You can get away with not citing things that got published in second tier field journals or lower, but if it was in a top field journal, it needs to be in your list of works cited.

Now, if you’re a white male asshole at a top school, you can make your career out of proving another top economist’s top general interest paper was wrong.  Or, if it’s a female top economist, all you really have to do is harshly question it.  If you’re female and you do this, it can destroy your budding career unless you coauthor with a senior top male economist or two who will take the credit and shift the blame to the bad paper author.

All of that aside… and back to the topic that inspired this post.

If you are a woman/non-famous person, how do you make it clear that your paper is doing new stuff without insulting your potential reviewers?  The answer, my friend, is data limitations.  Or, if it is much older work, new technology.  They *couldn’t* answer the question you’re answering because their dataset wasn’t good enough.  No fault of theirs.  You have something new to add because of your great luck or your hard work.  This probably explains why I am forever amassing new datasets instead of writing papers with the sets I already have.  (That and I’m a dilettante).

So, is this good advice?  I don’t know.  My career looks like a glass ceiling– I am very good at publishing at top field journals, but have yet to hit a top general interest journal.  Some of this is because other than my job market paper I didn’t send my work to top field journals until after tenure, but some of it is that I still don’t know how to play the game perfectly and my reputation is not such that I get the benefit of the doubt.  I still get desk rejects with useless comments for papers that end up getting accepted with minor revisions at similar journals.  There’s a lot of crap shooting going on.

(Disclaimer:  #notalleconomists are assholes, #notalltopeconomists are assholes.  Some are really nice and are generous with their citations and work and try to write the best papers they can because they care about economics and policy.  Others care a lot about playing the publication game.  I’m sure it’s similar in many lines of work.)

Ask the grumpies: whether or not to purchase insurance

H.I.P. Person (Home Insurance Purchasing Person) asks:

How do you decide if you need insurance for something? We are updating our home owners coverage and they are peddling the following:

1) service line coverage –  up to $10,000 per event
2) systems coverage (a/c, hvac, water heater, furnace, and the like) – up to $50,000 per problem
3) sewer back up (?? not sure of max coverage)

We live < 75 miles from the coast; <20 miles from two major water coastal inlets but  not in a flood zone. What hurricane related insurance should we own? The policy comes with wind/water but not flood and they don’t really want to sell us flood (they are offering #3 instead).

Are any of these worth it?  What price point would make them worth it or not?

DISCLAIMER:  We are not financial advisors.  Get advice from real professionals or do your own research before making important monetary decisions.

So in economics, you purchase insurance when the expected utility of the insurance is greater than the cost of the insurance.  So, assuming you knew how your utility function was shaped (the important part for this purpose is that you know your coefficient of risk aversion, in this case specifically how much you hate the possibility of loss), and you know the probability of a bad thing happening, you just multiply that probability by your expected utility plugging in the amount you’d be out if the bad thing happens and then add the probability that the bad thing doesn’t happen and multiply that by your expected utility plugging in the amount you’d have if the bad thing didn’t happen.  Problem is… in reality, we usually don’t know the probabilities of these negative events occurring (or even what those negative evens could be!) and we definitely have no clue about what our utility functions look like.

So how does one decide what to get insurance on in reality?  Well, if you have rough ideas of probabilities, you can look at the expected value of something happening.  Expected value is like expected utility, but it tells you what the break-even point is assuming you have no emotions.  You’re neither a gambler nor risk averse.  But risk averse you can look at those numbers and think to yourself, “How do I feel about this calculation?”  In general, the insurance company is out to make money, so they’ll be charging more than the expected value of the thing happening, but does the amount more that they’re charging seem reasonable to you?

If you don’t know the probabilities of something bad happening, you can still play with worst case scenarios:  If the bad thing happens, what would you have to pay out of pocket to fix it without insurance?  What would you have to pay out of pocket with their insurance?  Is the peace of mind for the difference between those two numbers worth what they’re charging?  (And again, if you have rough ideas of how probable these events are, you can factor that in as well).

Another thing to do is to google around, preferably with reputable sites, to see what kinds of insurance are usually a good idea and what kinds are generally scams.  You can ask people around you too, though people often do things that don’t make sense if there’s good marketing on the part of the insurance company or if they’re more credit constrained or risk seeking than you are.

An important thing to note is that you want insurance to insure against risk.  You don’t want it as a pre-payment for things you’re going to pay for eventually.  You don’t want a high monthly cost if you can avoid it by sharing some of the pain should disaster strike through a higher deductible.  The goal isn’t to save money, it’s to smooth your consumption over good and bad states of the world.  Don’t try to beat insurance– in the best states of the world you give them money and they never give you money.  But you want it there when disaster strikes if you can’t handle the disaster on your own.

If it were me, I’d definitely eschew the service line coverage unless it was really cheap– we can afford a 10K emergency.  Since the limit is capped, it is not actually useful insurance unless paying up to 10K would be devastating.  (Capped insurance is often a red flag– if they stop paying after a certain amount is spent you may be better off self-insuring because if something really terrible happens they’re not going to be much use, and self-insuring means you’re not paying for the additional administrative costs of going through them.)

Systems coverage again, we probably wouldn’t pay… replacing a/c, hvac, water heater, furnace etc. is all stuff that has to get done some time anyway (and none of these should cost 50K, unless that’s including the damage after a water heater explodes or something) so paying them is like pre-paying for bills you’re going to have, but it is likely you’re going to have less choice about how to make those replacements and you’ll be paying their administrative costs over what you’d be paying if you did these things yourself.  And, again, it’s capped.  This is unlikely to be good insurance.

Sewer back-up is the only one of these that doesn’t sound 100% scammy.  Check all your other insurances to see if this is covered under them.  Estimate how much a sewer backup could destroy.  Make sure that it’s unlimited covered and not capped and there are no other strings attached.  Think about the probability of this happening.  Look at how much they’re charging for it.  Then go with your gut.

We have no idea about hurricane insurance.  The internet has a bunch of pages about it, noting you should get wind and flood on top of home, but I’m not getting a good idea of what numbers you should be looking at or even how to make that calculation.  You may also want to look into the different deductibles they offer, because none of these sound particularly cheap, but it may be that if you have a high deductible the insurance cost will be more reasonable (assuming you can afford the deductibles).

Good luck!

Grumpy Nation, do you have any better advice for H.I.P.?