# A Philosophical Essay on Probabilities/Chapter 15

CHAPTER XV.
CONCERNING THE BENEFITS OF INSTITUTIONS WHICH DEPEND UPON THE PROBABILITY OF EVENTS.
Let us recall here what has been said in speaking of hope. It has been seen that in order to obtain the advantage which results from several simple events, of which the ones produce a benefit and the others a loss, it is necessary to add the products of the probability of each favorable event by the benefit which it procures, and subtract from their sum that of the products of the probability of each unfavorable event by the loss which is attached to it. But whatever may be the advantage expressed by the difference of these sums, a single event composed of these simple events does not guarantee against the fear of experiencing a loss. One imagines that this fear ought to decrease when one multiplies the compound event. The analysis of probabilities leads to this general theorem.
By the repetition of an advantageous event, simple or compound, the real benefit becomes more and more probable and increases without ceasing; it becomes certain in the hypothesis of an infinite number of ​repetitions; and dividing it by this number the quotient or the mean benefit of each event is the mathematical hope itself or the advantage relative to the event. It is the same with a loss which becomes certain in the long run, however small the disadvantage of the event may be.
This theorem upon benefits and losses is analogous to those which we have already given upon the ratios which are indicated by the indefinite repetition of events simple or compound; and, like them, it proves that regularity ends by establishing itself even in the things which are most subordinated to that which we name hazard.
When the events are in great number, analysis gives another very simple expression of the probability that the benefit will be comprised within determined limits. This is the expression which enters again into the general law of probability given above in speaking of the probabilities which result from the indefinite multiplication of events.
The stability of institutions which are based upon probabilities depends upon the truth of the preceding theorem. But in order that it may be applied to them it is necessary that those institutions should multiply these advantageous events for the sake of numerous things.
There have been based upon the probabilities of human life divers institutions, such as life annuities and tontines. The most general and the most simple method of calculating the benefits and the expenses of these institutions consists in reducing these to actual amounts. The annual interest of unity is that which ​is called the rate of interest. At the end of each year an amount acquires for a factor unity plus the rate of interest; it increases then according to a geometrical progression of which this factor is the ratio. Thus in the course of time it becomes immense. If, for example, the rate of interest is 1/20 or five per cent, the capital doubles very nearly in fourteen years, quadruples in twenty-nine years, and in less than three centuries it becomes two million times larger.
An increase so prodigious has given birth to the idea of making use of it in order to pay off the public debt. One forms for this purpose a sinking fund to which is devoted an annual fund employed for the redemption of public bills and without ceasing increased by the interest of the bills redeemed. It is clear that in the long run this fund will absorb a great part of the national debt. If, when the needs of the State make a loan necessary, a part of this loan is devoted to the increasing of the annual sinking fund, the variation of public bills will be less; the confidence of the lenders and the probability of retiring without loss of capital loaned when one desires will be augmented and will render the conditions of the loan less onerous. Favorable experiences have fully confirmed these advantages. But the fidelity in engagements and the stability, so necessary to the success of such institutions, can be guaranteed only by a government in which the legislative power is divided among several independent powers. The confidence which the necessary cooperation of these powers inspires, doubles the strength of the State, and the sovereign himself gains then in legal power more than he loses in arbitrary power.
​It results from that which precedes that the actual capital equivalent to a sum which is to be paid only after a certain number of years is equal to this sum multiplied by the probability that it will be paid at that time and divided by unity augmented by the rate of interest and raised to a power expressed by the number of these years.
It is easy to apply this principle to life annuities upon one or several persons, and to savings banks, and to assurance societies of any nature. Suppose that one proposes to form a table of life annuities according to a given table of mortality. A life annuity payable at the end of five years, for example, and reduced to an actual amount is, by this principle, equal to the product of the two following quantities, namely, the annuity divided by the fifth power of unity augmented by the rate of interest and the probability of paying it. This probability is the inverse ratio of the number of individuals inscribed in the table opposite to the age of that one who settles the annuity to the number inscribed opposite to this age augmented by five years. Forming, then, a series of fractions whose denominators are the products of the number of persons indicated in the table of mortality as living at the age of that one who settles the annuity, by the successive powers of unity augmented by the rate of interest, and whose numerators are the products of the annuity by the number of persons living at the same age augmented successively by one year, by two years, etc., the sum of these fractions will be the amount required for the life annuity at that age.
Let us suppose that a person wishes by means of a ​life annuity to assure to his heirs an amount payable at the end. of the year of his death. In order to determine the value of this annuity, one may imagine that the person borrows in life at a bank this capital and that he places it at perpetual interest in the same bank. It is clear that this same capital will be due by the bank to his heirs at the end of the year of his death; but he will have paid each year only the excess of the life interest over the perpetual interest. The table of life annuities will then show that which the person ought to pay annually to the bank in order to assure this capital after his death.
Maritime assurance, that against fire and storms, and generally all the institutions of this kind, are computed on the same principles. A merchant having vessels at sea wishes to assure their value and that of their cargoes against the dangers that they may run; in order to do this, he gives a sum to a company which becomes responsible to him for the estimated value of his cargoes and his vessels. The ratio of this value to the sum which ought to be given for the price of the assurance depends upon the dangers to which the vessels are exposed and can be appreciated only by numerous observations upon the fate of vessels which have sailed from port for the same destination.
If the persons assured should give to the assurance company only the sum indicated by the calculus of probabilities, this company would not be able to provide for the expenses of its institution; it is necessary then that they should pay a sum much greater than the cost of such insurance. What then is their advantage? It is here that the consideration of the moral ​disadvantage attached to an uncertainty becomes necessary. One conceives that the fairest game becomes, as has already been seen, disadvantageous, because the player exchanges a certain stake for an uncertain benefit; assurance by which one exchanges the uncertain for the certain ought to be advantageous. It is indeed this which results from the rule which we have given above for determining moral hope and by which one sees moreover how far the sacrifice may extend which ought to be made to the assurance company by reserving always a moral advantage. This company can then in procuring this advantage itself make a great benefit, if the number of the assured persons is very large, a condition necessary to its continued existence. Then its benefits become certain and the mathematical and moral hopes coincide; for analysis leads to this general theorem, namely, that if the expectations are very numerous the two hopes approach each other without ceasing and end by coinciding in the case of an infinite number.
We have said in speaking of mathematical and moral hopes that there is a moral advantage in distributing the risks of a benefit which one expects over several of its parts. Thus in order to send a sum of money to a distant part it is much better to send it on several vessels than to expose it on one. This one does by means of mutual assurances. If two persons, each having the same sum upon two different vessels which have sailed from the same port to the same destination, agree to divide equally all the money which may arrive, it is clear that by this agreement each of them divides equally between the two vessels the sum which ​he expects. Indeed this kind of assurance always leaves uncertainty as to the loss which one may fear. But this uncertainty diminishes in proportion as the number of policy-holders increases; the moral advantage increases more and more and ends by coinciding with the mathematical advantage, its natural limit. This renders the association of mutual assurances when it is very numerous more advantageous to the assured ones than the companies of assurance which, in proportion to the benefit that they give, give a moral advantage always inferior to the mathematical advantage. But the surveillance of their administration can balance the advantage of the mutual assurances. All these results are, as has already been seen, independent of the law which expresses the moral advantage.
One may look upon a free people as a great association whose members secure mutually their properties by supporting proportionally the charges of this guaranty. The confederation of several peoples would give to them advantages analogous to those which each individual enjoys in the society. A congress of their representatives would discuss objects of a utility common to all and without doubt the system of weights, measures, and moneys proposed by the French scientists would be adopted in this congress as one of the things most useful to commerical relations.
Among the institutions founded upon the probabilities of human life the better ones are those in which, by means of a light sacrifice of his revenue, one assures his existence and that of his family for a time when one ought to fear to be unable to satisfy their needs. As far as games are immoral, so far these institutions ​are advantageous to customs by favoring the strongest bents of our nature. The government ought then to encourage them and respect them in the vicissitudes of public fortune; since the hopes which they present look toward a distant future, they are able to prosper only when sheltered from all inquietude during their existence. It is an advantage that the institution of a representative government assures them.
Let us say a word about loans. It is clear that in order to borrow perpetually it is necessary to pay each year the product of the capital by the rate of interest. But one may wish to discharge this principal in equal payments made during a definite number of years, payments which are called annuities and whose value is obtained in this manner. Each annuity in order to be reduced at the actual moment ought to be divided by a power of unity augmented by the rate of interest equal to the number of years after which this annuity ought to be paid. Forming then a geometric progression whose first term is the annuity divided by unity augmented by the rate of interest, and whose last term is this annuity divided by the same quantity raised to a power equal to the number of years during which the payment should have been made, the sum of this progression will be equivalent to the capital borrowed, which will determine the value of the annuity. A sinking fund is at bottom only a means of converting into annuities a perpetual rent with the sole difference that in the case of a loan by annuities the interest is supposed constant, while the interest of funds acquired by the sinking fund is variable. If it were the same in both cases, the annuity corresponding to the funds ​acquired would be formed by these funds and from this annuity the State contributes annually to the sinking fund.
If one wishes to make a life loan it will be observed that the tables of life annuities give the capital required to constitute a life annuity at any age, a simple proportion will give the rent which one ought to pay to the individual from whom the capital is borrowed. From these principles all the possible kinds of loans may be calculated.
The principles which we have just expounded concerning the benefits and the losses of institutions may serve to determine the mean result of any number of observations already made, when one wishes to regard the deviations of the results corresponding to divers observations. Let us designate by $x$ the correction of the least result and by $x$ augmented successively by $q$, $q'$, $q''$, etc., the corrections of the following results. Let us name $e$, $e'$, $e''$, etc., the errors of the observations whose law of probability we will suppose known. Each observation being a function of the result, it is easy to see that by supposing the correction $x$ of this result to be very small, the error $e$ of the first observation will be equal to the product of $x$ by a determined coefficient. Likewise the error $e'$ of the second observation will be the product of the sum $q$ plus $x$, by a determined coefficient, and so on. The probability of the error $e$ being given by a known function, it will be expressed by the same function of the first of the preceding products. The probability of $e'$ will be expressed by the same function of the second of these products, and so on of the others. The probability of the ​simultaneous existence of the errors $e$, $e'$, $e''$, etc., will be then proportional to the product of these divers functions, a product which will be a function of $x$. This being granted, if one conceives a curve whose abscissa is $x$, and whose corresponding ordinate is this product, this curve will represent the probability of the divers values of $x$, whose limits will be determined by the limits of the errors $e$, $e'$, $e''$, etc. Now let us designate by $X$ the abscissa which it is necessary to choose; $X$diminished by $x$ will be the error which would be committed if the abscissa $x$ were the true correction. This error, multiplied by the probability of $x$ or by the corresponding ordinate of the curve, will be the product of the loss by its probability, regarding, as one should, this error as a loss attached to the choice $X$. Multiplying this product by the differential of $x$ the integral taken from the first extremity of the curve to $X$ will be the disadvantage of $X$ resulting from the values of $x$ inferior to $X$. For the values of $x$ superior to $X$, $x$ less $X$ would be the error of $X$ if $x$ were the true correction; the integral of the product of $x$ by the corresponding ordinate of the curve and by the differential of $X$ will be then the disadvantage of $X$ resulting from the values $x$ superior to $x$, this integral being taken from $x$ equal to $X$ up to the last extremity of the curve. Adding this disadvantage to the preceding one, the sum will be the disadvantage attached to the choice of $X$. This choice ought to be determined by the condition that this disadvantage be a minimum; and a very simple calculation shows that for this, $X$ ought to be the abscissa whose ordinate divides the curve into two equal parts, so that it is thus probable ​that the true value of $x$ falls on neither the one side nor the other of $X$.
Celebrated geometricians have chosen for $X$ the most probable value of $x$ and consequently that which corresponds to the largest ordinate of the curve; but the preceding value appears to me evidently that which the theory of probability indicates.