The reason insurance makes sense is that financial utility is
nonlinear. A $125,000 bill is much more than 1000 times as awful as a
$125 bill, so it makes sense to pay $125 to offset a 1/2000 chance that
you'll have a $125,000 bill. It looks like the insurance company is
scamming you, since they're making 50% profit. Well, so they are. But
it's still a rational decision to buy the insurance.
Likewise, the utility of having $250,000 may be more than 50% the
utility of having $500,000 - I personally would put it at 70% to 80%.
If you have a 50% chance of winning $500,000, it may make perfect sense
to sell the ticket to someone for $200,000, even though it looks like
you're "losing money" on the deal. If you're a billionaire, of course,
so that $250K makes no difference to your quality of life, then the
utility of $250K is almost precisely 50% of the utility of $500K, and it
makes sense to buy the ticket from me.
Because quality of life doesn't scale linearly with money, and because
different individuals and corporations have different utility functions
for gains or losses of a given quantity, there's room for mutually
beneficial, utility-maximizing trades. That's how insurance ought to
work. It's not about spreading risk between individuals, it's about
spreading risk between probable futures. From that perspective, there's
nothing antisocial about having tightly partitioned groups.
-- email@example.com Eliezer S. Yudkowsky http://singinst.org/beyond.html
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