tag:blogger.com,1999:blog-3891434218564545511.post6653179437363492183..comments2024-03-28T13:23:50.623-05:00Comments on Alexander Pruss's Blog: Attitudes to risk and the law of large numbersAlexander R Prusshttp://www.blogger.com/profile/05989277655934827117noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-3891434218564545511.post-478464447649691872011-11-08T19:56:27.002-06:002011-11-08T19:56:27.002-06:00An insurance is a lottery whose winning always cor...An insurance is a lottery whose winning always correlates with one's suffering a loss. :-)<br /><br />I deliberately talked of art collectors insuring their collections, because I fully agree about catastrophic losses. I think what is going on in cases of catastrophic losses is that under the catastrophic circumstances the money one gets from insurance is worth more to one then than it was when one way paying the premiums. For instance, suppose one needs a car to hold on to one's employment, and one wouldn't be able to afford to buy another car if one's existing car were stolen. In that case, one's premiums are just worth their face value to one, but the insurance money when the car is stolen is worth not just the value of the car, but the value of the car plus the value of one's employment.<br /><br />But having one Old Master stolen from among twenty is not catastrophic in this way, except perhaps psychologically, and that's an irrational psychology. There is no Gambler's Ruin here. (Maybe having all your paintings stolen at the same time would be catastrophic to one's collection. But I assume that typically artwork is insured individually, and not just against the loss of the whole collection, or of, say, half of the collection.) Nor is it the case that when one has lost one Old Master from among twenty, a dollar suddenly becomes, say, twice as valuable as it was when one was paying the premiums, though it may become a little more valuable (say, 5% more).Alexander R Prusshttps://www.blogger.com/profile/05989277655934827117noreply@blogger.comtag:blogger.com,1999:blog-3891434218564545511.post-61330976183815292642011-11-08T10:32:17.475-06:002011-11-08T10:32:17.475-06:00It seems to me that there are two important points...It seems to me that there are two important points to note.<br /><br />First, although they deviate similarly from the LLN EV-calculations, insurance is not like lotteries. Insurance is about preventing low-frequency but catastrophic losses, while lotteries are about making low-frequency but gigantic gains. The human mind treats losses and gains differently; losses are worse than equivalent gains. I suspect this has to do with the fact that in evolutionary history, and today, if losses are sufficiently bad you cannot recover to have another large set of numbers go your way…Gambler’s Ruin. So I don’t think it’s irrational to buy insurance in the same way it’s irrational to play the lottery (one might explain this by saying that the utility deviates significantly from the monetary reward in the two cases.)<br /><br />Second, who plays the lottery? Not people with a reasonably good life, but poor people. There are two ways to explain this: (1) poor people are more likely to be irrational—maybe this is part of the explanation of why they are poor. (2) The change in utility represented by winning the lottery is far out of proportion to the change in one’s bank account. Winning the lottery is the ticket to a whole different style of life, and a much better one. (I was introduced to this second interpretation by MacIntyre; he thought of it as a this-worldly version of Pascal’s Wager.)<br /><br />Anyway, the common thread is that you can preserve the idea that people are rational in expected utility terms, if you are willing to break the connection between $1=1 utile in significant ways.Heath Whitehttps://www.blogger.com/profile/13535886546816778688noreply@blogger.com