Okay fine. You want the point-by-point, you get the point-by-point.
Part of the fun of this game is possibly finding treasure after your battles and searching. And gaining XP and leveling in balance with your team mates to where everyone feels they make a worthwhile contribution. Take that away and you remove a big psychological reward incentive.
That's fine and all, but it has no bearing at all on instanced loot vs. uninstanced loot.
I don't want to argue my point in circles but I still don't see why you say it is difficult or impossible to have loot distribution per individual.
Instanced loot done properly requires a central persistent server keeping track of all character data. See Diablo 3 or Path of Exile or other MMO's.
No such central persistent server exists for D:OS, and no such persistent server is planned. All data is kept in the host save file, including all character data. There is no character data independent of the entire save file. There is no client-side save file. (Digression: At most the host can e-mail the clients a copy of the save file, but that only allows the client to play separately. There is no way to merge the client and host save files back into one. One can only be replaced with the other.)
I'm not advocating 4x the loot or saying if one person finds a rare then everyone does also at the same time.
That sentence contradicts itself.
The game is not set up for instanced loot. In the multiplayer, you and Bob can see a chest which has been unopened. (As an aside, the things in the chest were set on the loading of the map to make a roughly fair distribution of loot for a variety of potential playstyles.) You can watch Bob walk up to the chest and open it and remove things. Then the chest is empty. The host and the guest are playing the exact same instance of the game.
That's important. What you and the other people asking for "instanced loot" are really asking for is for each player to be playing a different instance in the same space. The game is not structurally designed for that.
Once again, all character data is kept in one place, the host save file. That host save file has one loot table generated on the start of the map. This game is specifically designed for "drop-in, drop-out" co-op. Drop-in, drop-out co-op means that you can start a game in single-player and then a person in multiplayer can join in and take control of another character in your party. That second player can then seamlessly leave the game and you get control of all the characters back.
You can also start a game in multiplayer as the host, and then other players leave and you as the host continue, getting control of the players back.
You see what's happening here? In D:OS and D:OS 2, there is no such thing as separate single-player and multiplayer. It's all the same game. In Path of Exile, multiple players hang out in town and walk around the camp. Two players can each leave and walk out into the world onto totally different dungeon instances at the same time and never see each other. If they want to work together, they need to do something special to be in the same party, and they get the same instance.
If loot equality were to be added into D:OS 1, so that chest gives each of 4 players a different drop, that is quadrupling the amount of loot because it's all the same game, all that information is still stored in the single place, the host save file. Once the other players leave, all that extra loot is still on the other player's characters, which are under the control of the host in single-player.
Even if the host is a nice guy, that does not solve the problem that you have increased the amount of loot drops by 2-4 times compared to the single-player, which breaks the game balance and the economy balance.
That should be enough info for you to figure it out because I have better things to do than to explain.