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Notes -
I understand this is what is taught, I was taught it in uni. Nevertheless, I disagree.
This model of a man they have conjured to justify insurance, is neither a homo rationalis economicus (for whom it would be far too inefficient), nor your neighbour (who enjoys gambling).
There is no good reason to privilege the 'original state', your living standard now. Yes one (insurance) maintains it and the other (lottery) changes it, but why does that matter?
Some people live in a house, but they prefer some randomness in their life, so they take a 50/50 chance of living either in a mansion or a condo. It's fine. I mean I think it's a cool way to live, but it's an aesthetic preference, I would never advise people to essentially burn money to get that volatility (like economics profs are advising people to burn money to get rid of it).
You could say the neighbour is just gambling when he purchases insurance, it's just that he uses the high from winning to compensate for the psychic pain of the loss of his house.
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