[fighterpilot]

> How can it be sensible if one thinks it's 'highly unlikely'?

Hedging a highly unlikely situation can still be sensible. Those two things are definitely not mutually exclusive.

If all your net worth is tied up in your house, it's probably sensible and rational to get fire insurance on your house, even if it's highly unlikely that your house will burn down. This question has been studied extensively in utility theory.

[goatlover]

But should you get insurance in case a meteor hits your house? Fires happen often enough, but some events are low enough probability not to worry about. A house being destroyed by a meteor strike isn't worth spending money on.

[fighterpilot]

X = P(bad_outcome) * magnitude_of_badness

Y = your net worth

You can trade-off one with the other.

People with lots of Y will be more happy to reduce Y in order to reduce X, because the marginal utility of Y declines with larger values of Y, whereas marginal utility of X remains roughly the same irrespective of values of Y.

> Fires happen often enough, but some events are low enough probability not to worry about.

This ignores the second part of X, which is magnitude_of_badness. Your house burning down has a smaller magnitude_of_badness than society collapsing which will likely lead to death.

It's also ignoring the marginal utility of wealth for large values of Y. Even if X is small, people with large Y will be more happy to reduce Y in order to reduce X.