apparently to figure out whether the risk is worth taking you multiply expected value of the outcome by it’s probability.
Nope, that’s how you calculate the expected value and not the risk. In fact, risk is entirely absent from this calculation.
But buying insurance is a slightly different question. Basically, insurance makes sense when a possible loss will have large secondary and tertiary effects the negative value of which is large.
For example, consider a retired couple without much savings living in a house with a paid-off mortgage. Let’s say the house is worth $200K. What happens if the house burns down? Is their loss $200K? Nope, their loss is much bigger because they don’t have a place to live, can’t afford another house, and their life just got much worse—more than the nominal loss of $200K would indicate.
Nope, that’s how you calculate the expected value and not the risk. In fact, risk is entirely absent from this calculation.
But buying insurance is a slightly different question. Basically, insurance makes sense when a possible loss will have large secondary and tertiary effects the negative value of which is large.
For example, consider a retired couple without much savings living in a house with a paid-off mortgage. Let’s say the house is worth $200K. What happens if the house burns down? Is their loss $200K? Nope, their loss is much bigger because they don’t have a place to live, can’t afford another house, and their life just got much worse—more than the nominal loss of $200K would indicate.