Right, so they do it out of convenience, and just count on the courts as their insurance. Still, no one makes a decision and thinks *this is a stupid decision.* so in their minds, it must make sense somehow. 

If they lose it themselves, there is no-one to blame. In the age of tort I would imagine you could try to sue the pants off the custodian if they lose it. I haven't seen any custodian contracts but I imagine that is the thinking. There is no one to sue if you lose it yourself

BenAllenG

Yeah, it doesn't seem good. 

But I don't think people make stupid decisions in general, so I really want to figure out: what is the motivation here?

We all think that centralization is bad and trusting somebody else to hold your keys is bad, but here are people with a ton of skin in the game doing exactly the opposite of what makes sense. 

Scoresby

bitcoin

47% of Bitcoin hashrate uses same custodian

I agree with you! This just leads to centralization which is the exact opposite of BTC!