Profit center

Warranties are fantastically profitable for the manufacturer, and I claim this means they area bad deal for you. iPods are fantastically profitable for the manufacturer, and I just bought a new one with Christmas gift cards. This seems, on the face of it, contradictory. Ah, but an iPod has difficult to calculate subjective value. A warranty's sole value is cash. (AFAIK, they rarely give you better treatment when you have a warranty; rather the reverse, in fact, since you're a cost center.) Thus, it is possible for us to calculate the expected value of your warranty. And trust me, if the manufacturer makes a lot of money on it, then by definition, it has a high negative expected value for you. There is the peace of mind that comes from knowing people will repair your appliance if it breaks. But people will repair your appliance even if you don't have a warranty! You just have to pay them. And the way to bet is that you will spend more money on warranties then on repairs, if you buy them. What about insurance? My interlocturs ask. Insurance is for catastrophic events--it allows us to use the magic of pooling to protect ourselves against losses so big, and improbable, that they could wipe us out. If repairing your washer is in that category, then you should not be buying a new washer. Yes, people are risk averse. That's how manufacturers make all this money on warranties. But you can train yourself out of handing over unnecessarily large sums to the manufacturer. Try this: every time you don't buy a warranty, deposit the money in an interest-bearing savings account. I virtually guarantee that after five years or so of this, you will have a healthy account balance and no worries about paying for sudden repairs. Yes, in individual cases buying the extended warranty turned out, after the fact, to be a good decision. I have also seen people go all in while drawing to an inside straight, and win the pot. But I'm not tempted to emulate them.

This article available online at:

http://www.theatlantic.com/business/archive/2008/01/profit-center/2567/