Abstract
Abstract Diminishing returns in value create a parallel economic phenomenon, an aversion to risky outcomes. This well-known phenomenon leads to widespread purchases of insurance against various financial risks. Uncertainty in treatment outcomes creates the same problem, but no insurance exists to “pay off” when treatment outcomes are low. Instead, this chapter assesses how reductions in treatment uncertainty, measured by changes in the variance of treatment outcomes, add value, thereby measuring “risk-adjusted” improvements in average gains in quality of life. Similarly, increasing the chances of highly beneficial outcomes, the “value of hope,” is measured by changes in the positive skewness of outcome distributions. These are all combined in a Taylor series expansion showing how to estimate the “certainty equivalent” amount of health gain that various treatments provide, adjusting average gains (as normally measured in cost-effectiveness analysis) by changes in variance, skewness, and, potentially, higher order measures of risk.
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