Is an extended warranty a screen?

Why Gadget Warranties Are (Almost) Never Worth It
by: Geoffrey A. Fowler
Dec 09, 2015
Click here to view the full article on WSJ.com

TOPICS: Decision Making Under Uncertainty, Insurance

SUMMARY: Crunch the numbers, and you'll see there are very few reasons to buy AppleCare or other plans, Geoffrey A. Fowler says.

CLASSROOM APPLICATION: Students can examine the economics of extended warranties. The advice in the article: "Most extended warranties like AppleCare, or those from Asurion and SquareTrade, for broken, lost or stolen electronics are a bad deal. And in some cases, they're a downright rip-off.... Insurance makes sense on the big things in life, like your house or your health. The cost of fixing either can be astronomical. But the pain of repairing consumer electronics-even pricey ones like a laptop-is still relatively limited." That is, extended warranties are expensive and, when only small losses are possible, people should self-insure. The article also cites Richard Thaler about the behavioral economics issues involved in recommending not to purchase.

QUESTIONS: 
1. (Introductory) Characterize the type of consumers who should purchase extended warranties for electronic devices and the types who should not?

2. (Advanced) What is "mental accounting"? Does the decision to choose an extended warranty involve behavioral economics?

3. (Advanced) What is Richard Thaler's recommendation about purchasing extended warranties for electronic devices?

Reviewed By: James Dearden, Lehigh University