Why does an economy need derivatives? (Quora Answer)

Economies need derivatives and speculators because of the need to transfer uncertainty from those who require stability to those with an ability to bear and manage risk.
The question could be better phrased, as derivatives are not actually speculative instruments. They are financial instruments which are sometimes used by speculators. To see the importance of this point, imagine a world without insurance against illness, fire, theft, or death.
Every insurance policy is a derivative on an underlying instrument. When a family breadwinner takes out a life insurance policy, he/she creates a derivative which pays off for his/her beneficiaries in a way that is correlated to future inability to provide for the family's welfare. Here the underlying instrument is a human life and the derivative is the insurance policy.
So a world without derivatives is a world in which each family lacks any financial ability to plan against unforeseen calamity. Whether that is a better world, is a question each of us must answer for ourselves.
- Eric Weinstein on Quora

Why does an economy need derivatives? (Quora Answer)

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