Tuesday, May 04, 2010

[afupetoi] Express small probabilities in terms of dollars

Humans have a difficult time understanding small probabilities.

Solution: multiply small probabilities by L=5000000 and express the resulting product in dollars.

The value L represents a "round" actuarial estimate of the value of a human life.  This method also has the handy feature that, if the probability is that of death, it gives the risk-neutral amount you should be willing to spend to avoid death by that cause.

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