Why Don’t People Hedge their Vacations?

I’ve been thinking about tourists on the East Coast this week, and it made me wonder why people don’t hedge their vacations? I’m not talking about what passes for “flight insurance” (insure your flight for only $32.67, but note the 75,000 instances in which we actually won’t refund the cost of your ticket after you file an insurance claim with a third party!), but actual weather-based futures contracts that could be timed to people’s vacations.

So for example, say you want to go to New York City for one week in July. You know there is some small chance it is going to be too hot to do anything and if you end up with, hypothetically speaking, 4 out of 7 days that week that are over 100 degrees, your vacation will be ruined. So how much do you think people would be willing to pay to get reimbursed the cost of plane tickets and a hotel room (say $3000) to guard against just that eventuality? $30? $60? $100? I’d bet there would be some market here. Could also work for say, hurricanes in Florida, no snow in ski resorts, or rain in London. (Well, maybe not rain in London… contract would probably be too expensive!) The key would have to be that the contracts or not performance dependent on a particular company (e.g., no hotel rooms in New Orleans), but actual verifiable weather events. I mean, that’s got to be easier to confirm than whether or not Greece has defaulted on its debt, right?

The only downside I can foresee is the inevitable accusations that Goldman Sachs will be simultaneously selling these contracts to clients and controlling the weather. But hey, we’ll leave that for the new Consumer Protection Bureau to sort out…

[Cross-posted at The Monkey Cage]

Joshua Tucker

Joshua Tucker is a Professor of Politics at New York University.