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arXiv:1507.04655q-fin.RM

Insurance makes wealth grow faster

Ole Peters, Alexander Adamou

Early discovery. Linked by one identifiable commenter. This paper is outside the main ranking; a mention is not an endorsement.

Abstract

Voluntary insurance contracts constitute a puzzle because they increase the expectation value of one party's wealth, whereas both parties must sign for such contracts to exist. Classically, the puzzle is resolved by introducing non-linear utility functions, which encode asymmetric risk preferences; or by assuming the parties have asymmetric information. Here we show the puzzle goes away if contracts are evaluated by their effect on the time-average growth rate of wealth. Our solution assumes only knowledge of wealth dynamics. Time averages and expectation values differ because wealth changes are non-ergodic. Our reasoning is generalisable: business happens when both parties grow faster.

arXiv comments
27 pages, 3 figures, 3 tables, 1 glossary
Journal reference
DOI
Subjects
q-fin.RMRisk Management econ.GNGeneral Economics

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Linked by 1 identifiable commenter in 1 comment across 1 thread, from Feb 2022 to Feb 2022. Found in 1 HN submission from May 2019 to May 2019. Open submission discussions.

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  1. The Kelly criterion: How to size bets (2019) 1 comment

    • This paper discusses that exact issue: Insurance makes wealth grow faster Ole Peters, Alexander Adamou https://arxiv.org/abs/1507.04655

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