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Insurance is negative EV only in dollars, not necessary in utility. Since most have a risk averse utility function, it's often positive EV in utility.
by hntrader 6y ago
Insurance is negative EV only in dollars, not necessary in utility. Since most have a risk averse utility function, it's often positive EV in utility.
- kqr 6y agoThe argument gets even better than that. Logarithmic utility corresponds to maximum growth of wealth (Kelly criterion), so insurance is actually often compatible with maximum growth of wealth. How can something be negative EV yet maximise growth? Compound returns. Insurance is only negative EV when considering a single period. The ongoing act of having insurance is positive EV in terms of growth. The way to get to that is to count EV as the geometric mean instead of arithmetic mean. This is a very common mistake still, even though it was discovered by Bernoulli in 1734. I strongly recommend reading that paper. It is very easy to read.