Once a month, I share with 904 other Millennials a brief newsletter highlighting the best tips about money I've read.

Hi, I'm Kevin.

Once a month, I share with 904 other Millennials a brief newsletter highlighting the best tips about money I've read.

The Price You Pay for Financial Complexity

Financially Well

January 16, 2025

A 30-year-old female can own a basic, $500,000 term life insurance policy for around $190 each year.

But what if she has no experience buying life insurance? What if she’s not familiar with how the industry makes money?

She might instead buy a (much more complex) whole life insurance policy. There, she’s more likely to encounter confusing policy terms. And she’s more likely to end up in a regrettable financial position.

At the very least, she would pay about $3,670 more every year for the complex policy.

Jim Chanos works as a professional investor. He spends his days searching for companies that may soon fail. Over the past decade, his research often has pointed him to online gambling companies.

Chanos recently made a regrettable decision himself. He targeted DraftKings, the sports gambling behemoth.

Chanos assumed, incorrectly, that all gambling companies make money the same way. But, Michael Lewis reports, DraftKings “is something else.” On his podcast, Against the Rules, Lewis calls DraftKings “something new. Something very weird.”

By “weird,” Lewis seems to mean “complex.” Sports gambling companies rely on complexity to make money. Because complexity enables them to significantly misprice their offerings.

And in 2024 alone, Americans lost close to $14 billion on these complex, mispriced bets.

Casinos pocket about 5-6% of all money wagered. This margin hasn’t changed in decades.

But here’s what has changed: gambling, due to mobile betting. And the financial incentives of the “house” – in this case, sportsbooks – have changed accordingly.

With mobile sports betting, Jim Chanos says, “people are making dumber and dumber bets.”

Not intentionally. Rather, they’re unfamiliar with how the industry has evolved. Michael Lewis explains:

“Casinos don’t coax you to play roulette with one set of odds, and then once you’re hooked, switch out the odds to make them far worse. But that’s exactly what these sportsbooks are doing – by coaxing people into parlay bets.”

A parlay combines multiple different bets into one single wager.

This combination makes the bet much more complex. And this complexity breeds misunderstanding. Most sports bettors never fully understand their odds or the sportsbook’s pricing.

Lewis details why:

“If you give someone 20-to-1 odds, they’ll go, ‘Oh, that’s great. I can bet one to get 20.’ They don’t stop and think that [based on the complexity of the bet], they should really get 100-to-1 odds.”

There’s this useful rule of thumb: with each additional leg of a parlay, the bookies keep an extra 5%.

DraftKings and FanDuel have learned how to herd their customers into longer and stupider parlays. Their TV promotions are designed with this one goal in mind. …It’s why the announcers and the ads are trying to get you to do that as opposed to just betting on the game. That’s why you hear people talking about their parlay bets.

Because that’s what the industry wants you to do.”

Mispricing exists in personal finance, too.

Sure, the industry and the products differ. But the incentives, particularly around complexity, are similar. Complexity generates revenue.

Let’s look at whole life insurance, active investing, and Parent Plus student loans as examples.

Life Insurance

Life insurance may provide the clearest, most common example.

NerdWallet calls basic term life insurance “the least expensive.” They explain that it “lasts a set number of years and simply offers coverage without building cash value.”

Why, then, wouldn’t life insurance agents regularly recommend this option? Because whole life insurance “costs on average roughly 17 times more than term coverage, with the same death benefit.”

Whole life insurance also may include an additional “surrender charge” if you decide that you need or want to terminate your policy. With term life insurance, you can just stop making payments.

Active Investing

In investing, you may find mispricing in the costs you incur.

Every ETF or mutual fund – including passive, low-cost index funds – has an expense ratio. As Bankrate suggests, “Think of the expense ratio as the management fee paid to the fund company (e.g., Vanguard) for the benefit of owning the fund.”

Whether you invest on your own or hire a professional, you’re subject to expense ratios when you invest.

Your investment costs could stop there, though.

But most financial institutions and money managers have different incentives. Their revenue increases when you believe that your investment choices always need to be complex. How could you possibly do this yourself, right?

In exchange for 1% of all your investments, though, they’ll make those choices for you.

And this “active” investing may help some people, especially during your retirement years. But most of us never hear the message that investing can be simple.

Historically, well-diversified index funds with low expense ratios will get you where you need to go with your investments. But we’re sold complexity, and often at a high price.

Parent Plus Loans

Financial complexity also can take less dubious forms.

For example, the two most common federal student loans are:

Direct subsidized loans
Direct unsubsidized loans

These loans offer students the lowest interest rates. They don’t include origination fees. And they qualify for income-based repayment plans.

But a third type of federal student loan exists: direct PLUS loans. With these loans, parents can borrow an unlimited amount of money on behalf of their undergraduate.

PLUS loan terms aren’t necessarily more complex than the other federal student loans. But the terms are quite different, including:

Higher interest rates
Origination fees
Ineligibility for income-based repayment

Paying for college is stressful. Many families are experiencing the process for the first time. And many families are in a precarious financial position when they do so.

Complexity doesn’t only mean jargon or ambiguity. Financial complexity also arises when unfavorable terms come from an unexpected source.

For some people, sports gambling causes no harm.

They may enjoy the entertainment. They may bet with and among friends. And perhaps they can afford to lose the money.

Similarly, complex personal finance products work for some people. Whole life insurance, actively-managed investments, and Parent Plus student loans all offer benefits.

But only for certain customers and under certain conditions.

Investor Jim Chanos laments that sports parlays “are really bad bets. Professional bettors don’t make those bets,” he adds. “But the public does.”

The betting public often believes that their sports knowledge protects them from losing money. So when incessant ads repeat that gambling has potential upside, we join in. We don’t hear from alternative voices.

In personal finance, we often believe that every financial company has our best interests in mind. So when a company rep touts a complex product, we want to trust him. We want to embrace the potential upside.

With sports, you could just… watch the game. That’s a clear, low-risk alternative.

Our alternatives in personal finance aren’t always so obvious. An employee with an incentive to push complex products likely won’t spend much time with you on other options.

But they exist. Basic term life insurance. Passive index funds. Federal direct loans.

When you understand what you’re betting on, you’re much less likely to end up in a regrettable position.