Most people have non-linear utility of money. Going from 10 thousand to 1 million is less impactful than going from 1 million to 1.99 million, even though it’s the same absolute change.
There’s a tool called “certain equivalent” which can help with answering “how much do I value money?”
It boils down to repeatedly asking and answering question: “If I had a choice between $X and 50% of $Y at which X would I be ambivalent about which side I pick” for different value of $Y, e.g. for Bob, the 25 year old postdoc it may be
50% chance of
Equivalent to certainty of
$10
$5
$100
$50
$1000
$500
$10000
$4000
$100000
$35000
$500000
$75000
Notice how at higher level certain equivalent is no longer just dividing by two. For Bob utility from having $75k is higher than 50% of utility of having $400k. The reason for this nonlinearity is usually downstream effects of having money. E.g. for Bob $75k would be enough to get a downpayment for house he wants and highly increase chance of him a comfortable life down the line. 50% chance of buying the house outright is not worth the risk for Bob.
Most people have non-linear utility of money. Going from 10 thousand to 1 million is less impactful than going from 1 million to 1.99 million, even though it’s the same absolute change.
There’s a tool called “certain equivalent” which can help with answering “how much do I value money?”
It boils down to repeatedly asking and answering question: “If I had a choice between $X and 50% of $Y at which X would I be ambivalent about which side I pick” for different value of $Y, e.g. for Bob, the 25 year old postdoc it may be
Notice how at higher level certain equivalent is no longer just dividing by two. For Bob utility from having $75k is higher than 50% of utility of having $400k. The reason for this nonlinearity is usually downstream effects of having money. E.g. for Bob $75k would be enough to get a downpayment for house he wants and highly increase chance of him a comfortable life down the line. 50% chance of buying the house outright is not worth the risk for Bob.