RISK TOLERANCE INTERPRETATION

Your risk tolerance for a given gamble is (approximately) twice your answer to the following question (at the time you face the given gamble):

 

WHAT IS THE LARGEST AMOUNT YOU WOULD WAGER ON A TRIPLE-OR-NOTHING BET WITH EVEN (50-50) ODDS?

Note that risk tolerance is measured in dollars, or the same units as the monetary amount. Thus the (x/Tol) ratio in the exponential function may be regarded as the "normalized" size of the monetary amount, measured in "number of risk tolerances." This is analogous to dividing the volume of blood in a syringe by total body blood volume to determine the number of unit exchanges necessary to accomplish a 50% exchange of blood during a transfusion. Money in a monetary system is like blood in a human body. They both facilitate exchanges!