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Even if the utility function was linear, I'd still prefer to insure some things, even with a negative expected value, for the sake of smoothing variance. EDIT:
by msandford 11y ago
Even if the utility function was linear, I'd still prefer to insure some things, even with a negative expected value, for the sake of smoothing variance.
EDIT: I'll clarify this to mean; even if the EV of insurance was exactly neutral, I'd still buy it for smoothing. And even if the EV was negative, I'd still buy it for smoothing. There's a difference between smoothing and loss aversion.
- ucaetano 11y agoNot for smoothing variance, as you don't care about positive veriations. You'd buy it to limit your downside. If people would buy it to minimize variance, they would also pay an insurance against winning the lottery.
- msandford 11y agoSome people choose to take 20 years of monthly payments from lottery winning rather than one lump sum. "Rationally" anyone who does that is a fool, and yet people constantly do that. Perhaps there's value to variance minimization, aside from the non-linear utility function of money?