Summary: the problem with Pascal's Mugging arguments is that, intuitively, some probabilities are just too small to care about. There might be a principled reason for ignoring some probabilities, namely that they violate an implicit assumption behind expected utility theory. This suggests a possible approach for formally defining a "probability small enough to ignore", though there's still a bit of arbitrariness in it.
This is not quite what happens. When you do UDT properly, the result is that the Tegmark level IV multiverse has finite capacity for human lives (when human lives are counted with 2^-{Kolomogorov complexity} weights, as they should). Therefore the "bare" utility function has some kind of diminishing returns but the "effective" utility function is roughly linear in human lives once you take their "measure of existence" into account.
I consider it highly likely that bounded utility is the correct solution.