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Insurance makes wealth grow faster

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  • Ole Peters
  • Alexander Adamou

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.

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  • Ole Peters & Alexander Adamou, 2015. "Insurance makes wealth grow faster," Papers 1507.04655, arXiv.org, revised Jul 2017.
    • Handle: RePEc:arx:papers:1507.04655
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    References listed on IDEAS

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    1. Ole Peters, 2010. "The time resolution of the St. Petersburg paradox," Papers 1011.4404, arXiv.org, revised Mar 2011.
    2. Ole Peters & Murray Gell-Mann, 2014. "Evaluating gambles using dynamics," Papers 1405.0585, arXiv.org, revised Jun 2015.
    3. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 629-649.
    4. Ole Peters & Alexander Adamou, 2015. "An evolutionary advantage of cooperation," Papers 1506.03414, arXiv.org, revised May 2018.
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