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ChrisHibbert comments on Money pumping: the axiomatic approach - Less Wrong
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The name of the service is "insurance". This is a business in which customers repeatedly make bets that they wish they hadn't made in retrospect, but it still makes sense to make the bet ex ante.
Please forgive the nitpicking but as an actuary, I do try to make this point whenever I feel it's helpful to do so:
Insurance is not betting. Insurance is removing variation and chance from your life, not introducing variation and chance to your life. A bet introduces risk where there was none before. Insurance removes risk when it already exists.
End of nitpicking.
That's exactly the same as hedging bets.
Which is why hedging is understood by people who hedge as insurance (unlike the bet they are trying to hedge).
A good point to remember, and I'd say the most useful way to think of it.
The problematic word seems to be "bet," and while I agree that most bets do increase variation, I feel like Chris/Stuart take bet to mean "an amount of money that pays returns when one outcome happens and not when another does." This adequately captures both traditional bets (bets that some thing will happen because one believes the probability of it happening is higher than one's betting partner believes it is) and insurance or hedging bets.
Agreed.
I work on prediction markets, so I see it all as bets, and am used to thinking that both participants in a purely financial trade can gain from it, even though many people on the outside of the deal see it as zero sum. Sometimes you increase your variance because you think it's worth increasing your expected return, other times you reduce your variation.
Actually, for most insurances, it makes no sense to do the bet at any point. Aggregating the risk over your lifetime, you're better off not paying the insurance (this doesn't apply to insurance for major disasters).