Robin Hood Math by Noah Giansiracusa

Author:Noah Giansiracusa [Giansiracusa, Noah]
Language: eng
Format: epub
Publisher: Penguin Publishing Group
Published: 2025-08-05T00:00:00+00:00

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* Here’s the idea behind this doubling of the expected loss. The logarithm of the financial outcome when the risk occurs, times the probability of the risk, plus the logarithm of the financial outcome when the risk doesn’t occur, times the probability the risk doesn’t occur, is called the expected utility. This is how much you expect to end up with, on average, measured logarithmically to capture impact. Exponentiating converts this back to a dollar figure and provides the amount of money you should be happy to end up with in lieu of taking the gamble on the uncertain risk. The difference between this amount and the full amount when the risk doesn’t occur is the price you should be willing to pay to avoid the risk. Some mathematical mucking around reveals that this difference is approximately twice the expected loss, at least when the probability of the risk is relatively low—which it typically is for the risks that enter cost-benefit calculations.

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