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In the real world it always goes the other way--the next dollar is never worth as much as the previous dollar, thus any fair bet costs more (the previous dollar
by LorenPechtel 2y ago
In the real world it always goes the other way--the next dollar is never worth as much as the previous dollar, thus any fair bet costs more (the previous dollar) than it gains (the next dollar.)
That's why you should only engage in negative bets, aka insurance. There you are trading a next dollar (worth less) for a previous dollar (worth more).
- GeorgeDewar 2y agoThis has really made insurance click for me because while I understand it intuitively, I wanted a more scientific foundation to understand its value. I think a great illustration is an extreme case. If I have a house and just enough income to cover all my needs and wants (including retirement savings), then depending on my attitude an extra $1000 per year might have no effect at all - I have nothing I want to spend it on and nothing to save for. But losing my home would still be devastating. So the utility value of the $1000 per year for the rest of my life is low or none, but the utility value of the previously earned money I would lose from losing my house is high.
- raincole 2y agoI don't know why you said "the other way", cause this is the exact thing I decribed in my previous comment.