A note from the founder - Sept 22

Which button will you press to the question below?

The answer heavily depends on what the person already has. If the person does not have $1million, she is most likely to choose a certain million $. If she already has $1 million or more, likely that she will take a 50% chance to go for $50 million.

What is interesting to note that this answer does not necessarily disclose our inherent risk-averse/risk-taking nature. The answer depends on one’s circumstance as much as risk-taking behaviour.

This question relates to a famous Swiss mathematician Bernoulli, who in the 18th century, wrote on the concept of ‘utility’. Bernoulli said the utility of anything one desires, including wealth, is inversely related to what one already has. This was a remarkable insight and economists since then adopted this concept of ‘utility’ and baked this concept into basic economic principles and models.

We all have heard of declining marginal utility - that states that joy or happiness derived from things, whether money or a pizza slice, reduces as one has increasing units of that thing.

The way we can use this concept in our financial planning to think of - What is ‘enough’ for me? Making ‘enough’ wealth and ensuring we always have ‘enough’ is an important test for us. It gives us peace of mind and a feeling of well-being. Therefore, this is a powerful principle for our decision-making framework.