Many thanks to Unknowns for inventing the scenario that led to this post, and to Wei Dai for helpful discussion.
Imagine you subscribe to the universal prior. Roughly, this means you assign credence 2^-k to each program of length k whose output matches your sensory inputs so far, and 0 to all programs that failed to match. Does this imply you should assign credence 2^-m to any statement about the universe ("hypothesis") that has length m? or maybe Kolmogorov complexity m?
The answer is no. Consider the following examples:
1. The complexity of "A and B and C and D" is roughly equal to the complexity of "A or B or C or D", but we know for certain that the former hypothesis can never be more probable than the latter, no matter what A, B, C and D are.
2. The hypothesis "the correct theory of everything is the lexicographically least algorithm with K-complexity 3^^^^3" is quite short, but the universal prior for it is astronomically low.
3. The hypothesis "if my brother's wife's first son's best friend flips a coin, it will fall heads" has quite high complexity, but should be assigned credence 0.5, just like its negation.
Instead, the right way to derive a prior over hypotheses from a prior over predictors should be to construct the set of all predictors (world-algorithms) that "match" the hypothesis, and see how "wide" or "narrow" that set is. There's no connection to the complexity of the hypothesis itself.
An exception is if the hypothesis gives an explicit way to construct a predictor that satisfies it. In that case the correct prior for the hypothesis is bounded from below by the "naive" prior implied by length, so it can't be too low. This isn't true for many interesting hypotheses, though. For example the words "Islam is true", even expanded into the complete meanings of these words as encoded in human minds, don't offer you a way to implement or predict an omnipotent Allah, so the correct prior value for the Islam hypothesis is not obvious.
This idea may or may not defuse Pascal's Mugging - I'm not sure yet. Sorry, I was wrong about that, see Spurlock's comment and my reply.
I think you are trying to make formal arguments based on informal definitions, leading to confusion. KC refers to program lengths, but if A,B,C are programs, then what is A||B||C? More careful definitions would lead to a more traditional conclusion.
For one way to formalize the A/B/C/D point, imagine you are trying to solve the UCI Census Income problem, where one attempts to predict whether a person's income is greater than 50k based on various other factors. Let A/B/C/D refer to binary predictors such as (is-married?), (is-religious?), (has-college-degree?), and (is-military?). The goal is to find a combination of these that predicts income well. Now it is of course true that (A||B||C||D) is more likely than (A&B&C&D) for a person. But there is no prior reason to believe that the OR-hypothesis has more predictive power than the AND-hypothesis, just as a KC-style analysis would indicate.
Whaa? I found that paragraph more confused than anything I wrote :-) Kolmogorov complexity is defined for arbitrary bit strings, which can be not programs but (say) statements about the world expressed in some formal language. Yeah, the definition of KC quantifies over programs that generate those bit strings; so what.
Cannot parse your second paragraph because I don't understand why "predictive power" should be related to prior probability of a hypothesis.