Psychology

Magnitudes

Someone might have a million GBP in the bank. There are over 7 billion people in the world. The US current debt is over a trillion USD dollars. What do all these numbers have in common? They sound like a lot. But when reading about them, that is the only similarity. Even though a company being worth a million or a billion dollars makes a huge difference, it is very hard for someone to perceive the difference on first notice since the idea of a million, a billion and a trillion are not used in our daily life.

So what are you suggesting?

There is a way around this problem. We have well-developed intuitions about smaller numbers since they appear frequently in our life. Hence, we can convert the giant numbers above to smaller numbers by thinking of magnitudes, or even simpler, how many digits the number has.

And what do I do with that?

Now that we have numbers written in magnitudes, we can easily compare them. For example, if our unit is euros, we can consider which items are in each magnitude:

  1. Cost of a meal, public transportation ticket
  2. Clothing
  3. Furniture, rent, plane tickets
  4. Family holiday
  5. Car
  6. House, wealth of smaller companies
  7. Launch of a reusable space rocket
  8. Airplane
  9. World population
  10. Ethereum’s Market Cap
  11. Cost of the British National Health Service
  12. Value of assets managed by the world’s largest hedge fund.
  13. National debt of the United States.

Every time we see a new number, we can think about where it lies in this magnitude list and compare it to what we already know. That way when we see that a million dollars were spent on a new car fleet for government officials, hopefully we’ll realize that a million is about the correct value for such a fleet, instead of being outraged at the sound of a million dollars being spent by the government in something apparently unnecessary.

Can you build a detailed magnitude list for yourself?

Edit: This Ted-Ed Video shows this concept in action. Enjoy!