This article describes how to use the Kelly criterion to make rational choices when confronted with a risky financial decision, and suggests a way to estimate the most you should be willing to pay for any particular sort of insurance.

The Kelly criterion (which at its core is the idea that the logarithm of your wealth is a better measure of money’s value to you than its absolute value) is well understood by the informed gambling community, and should be more widely known.

If you decide to apply the knowledge in this post, also consult with a financial professional (which as we’ll see later doesn’t include most finance or economics students, and most young financial professionals), and read the disclaimer at the end.