In Iron Man II Tony Stark is being slowly poisoned by the palladium in the ARC reactor in his chest. But the only thing that needs to be in his chest is the electromagnet that stops the shrapnel from entering his heart. The ARC reactor power source does not need to be inside his body. I realize that for reasons of plot and character progression, it needed to be done this way. But is there any in universe explanation for why Tony didn't just carry the ARC reactor in a fanny pack and run some wires to the electromagnet? (And don't say it's because of the hole in his chest or to power the Iron Man suit. A person who can build the reactor and armor can cover the chest hole, and the War Machine suit shows the reactor can be built into the suit itself.)
Yes Tony Could have a rig set up with the ARC reactor outside his chest cavity that would still supply power to the electromagnet keeping the shrapnel from killing him. However, there are two distinct but to Tony valid reasons why he keeps the thing that's killing him inside his chest.
- He is deeply concerned with anyone else obtaining the ARC technology. Keeping it essentially a part of him makes it that much harder for someone else to take it from him. Granted he did have separate reactors built into his previous suits, however those where under his personally designed security system, with extremely limited access. The only way the Air Force was able to obtain the Mark II platform in the first place was because Rhodey was the second closest person to Tony with almost unfettered access to his Iron Works.
- Tony views the necessity of having the reactor in his chest as a part of his "penance" for creating weapons of mass destruction for so long. It is a cruel reminder of the lack of morality he had up until the life changing incident that forced him to rely on tech he had written off initially to preserve him from something else he had designed that was slowly killing him. The fact that the ARC reactor was also slowly killing him was a second level of cruel irony.
Tony Stark should be able to figure out the appropriate order of actions. Step 1.) replace poisonous arc reactor with something that isn't crazy overkill. Step 2.) Work on replacing the palladium core without being on a self-imposed deadline. Step 3.) Stick new arc reactor back in chest, if you really want to...
He isn't doing it to protect the technology. He already made suits with external power supplies.
The only valid reason would be that he's suicidal, which isn't completely out of character considering his genius intellect.
In the original comic books, Tony didn't have the ARC reactor in his chest, it was built into the suits' underlayer (which was not included in any of the movies) which had to be worn at all times until he could get the remaining shrapnel removed. So palladium poisoning was never a problem in the comic books.
However, in the movies, the ARC Reactor is depicted as keeping the shrapnel away from his heart using an electromagnetic field (This works because polarization of the shrapnel and the electromagnet were opposites. But the reason it had to have the palladium power source in his chest was because it's an electromagnet. It runs on electricity. Sure, he could've carried it around outside his body, but if the power had been disconnected for just a little while.... well, you saw what happened when the reactor was taken away in the movie. He almost died, and it couldn't have been anymore than fifteen minutes.
If the external power source had been disconnected for that long, there wouldn't have been time to reconnect the power source to the ARC Reactor, seeing as how it was such a complex operation when he had to build it in the movie. It was just easier to have the palladium power source built into the reactor, for convenience and to avoid disaster. Does that answer your question?
Also, just gonna point out that if Tony carried it around in a fanny pack or something like that, they likelihood of it coming disconnected on a regular basis would be much higher. In order for him to carry it externally, he'd need wires running from it to what would presumably be electrodes stimulating the heart muscles. If those got yanked or pulled, he'd probably have to have surgery to repair them and they'd become a very easy target for people who wanted to hurt him. (See: The reason Wonder Woman's costume and all costumes with breast-shaped chestplates are dangerous and impractical.)
The arc reactor simply needs to be inside his chest because it is powering the electromagnet keeping him alive. If he were to wear the reactor in a fannypac of some sort it not only would be weird but impractical and dangerous. Any bad guy could just walk up and pull it away even if it we're under his shirt. Also you've seen the movies for even a short amount of time without the reactor, Tony goes into cardiac arrest due to not having the arc reactor powering the electromagnet. So if we we're to wrap this answer up with a bow or whatever, tony would just not do this.
Simple answer? Plot convenience.
Logically, it's a pretty simple fix. Take out the poisonous palladium, and shove in a few double A batteries. Maybe invent a super long-lasting battery. "this will power your heart for 50 lifetimes, or something big for 15 minutes." So you don't need that much power.
Once you've got the batteries powering the electro-magnet, use the suits with the arc reactor already installed. He could even use the electromagnet to charge the double A batteries in his chest if he wanted to. No palladium poisoning.
The only in-universe explanation that makes sense is the psychological factor. A self-inflicted penance, one that ended in Iron Man 3 when he became more committed to Pepper.
Out-of-universe explanation? Writers hoping you people won't nitpick. It's not a fatal flaw, but a fairly noticeable one. But it's sci-fi, so there's always going to be stuff to nit-pick :)