On Extended Warranties -- Betting Against the House

Now that the gift giving season is upon us, anyone buying an appliance, electronic devices that cost more than $40 or $50 (not sure where the cut off is exactly), or automobiles will face the dread question, "Would you like to purchase an extended warranty?"  A certain fear kicks in.  What if the thing ceases to function properly the day after the regular warranty expires?  The pricer the product the greater the fear.

Yes, I did get the extended warranty on an automobile once.  It was very expensive (relative to my income) and was a new, limited edition car, a turbo-charged all-wheel drive Celica.  "Sexy and sinister looking" one car magazine termed it.  That warranty paid off.  In the rare cases since then that I have bought extended warranties, they have not been useful.  In the rest, cases when I did not purchase one, I have not regretted not purchasing such a warranty.

Extended warranties provide one with "protection," which is just what one needs when one is fearful.  What if the $3,000 TV breaks down the day after the normal warranty expires?  Do I go out and buy another #3,000 TV?  Who can afford to do that on a regular basis?

I am here to allay your fears.  Words like "protection" are very comforting.  However, it is important that one think through the "logic" of extended warranties.  The manufacturer or merchant who offers an extended warranty is betting you that his product will not fail until after the extended warranty has expired.  If you purchase one, you are betting that the product you are buying will fail -- not during the period in which you are "protected" by the normal warranty, but during the period of the extended warranty, namely for the year or two years, etc., of the extended warranty.  

This is crazy stuff.  The manufacturer/merchant is betting that is product is soundly enough made to function properly until at least the end of the extended warranty.  He is actually standing behind his product.  He could raise his price to cover the cost of his occasional duds and offer a 3 or 4 year warranty to everyone.  However, he knows he will make more money by lowering his price and offering the extended warranty.  When you buy an extended warranty, you are, for all intents and purposes, betting against the house and we know that when you are gambling, and buying an extended warrant is tantamount to gambling, you should never bet against the house.

The reality is that we are better off self-insuring against any product going bad during the very unlikely period of the extended warranty than to buy these extended warranties.  I say "unlikely period of the extended warranty" because most things which last a year are likely to last for more than 2 or 3 more years.  This is especially true of electronic devices.  They tend to go bad quickly (manufacturing glitch)  or after some years (wears out in one way or another).  That has, at least, been my experience.  If you are tempted to buy an extended warranty tell yourself this:  I am now about to purchase of piece of crap that I am betting will die or need extensive repairs during the time betweenwhen the extended warranty kicks in and it expires.  If you think about that, you will be protected from buying protection.