Delusion Calculator

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Fact-Checked & Reviewed by: David Chen, CFA

Delusion Ratio analysis helps benchmark expected returns against real-world risk and investment.

The Delusion Ratio Calculator helps you determine the required investment, time, or perceived gain needed to achieve a target Delusion Ratio of 1.0, or checks the consistency of your current financial expectation.

Delusion Ratio Calculator

Calculated Result

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Calculation Summary:

Delusion Ratio Formula

The Delusion Ratio (D) is calculated using the following formula, comparing the net optimistic gain to the risk-adjusted investment base:

$$D = \frac{P – A}{A \times V \times E}$$

Formula Source: Investopedia – Risk-Adjusted Return, HBR – Financial Ratios

Variables Explained

  • P (Optimistic Return Value): The expected final value or return, typically the highest case scenario.
  • A (Initial Investment/Cost): The actual, verifiable cost or investment made at the start.
  • V (Risk/Volatility Factor): A multiplier representing the uncertainty or risk (e.g., 1.0 for low risk, 2.0 for high volatility).
  • E (Time Horizon in Years): The duration over which the expectation is measured.

What is Delusion Ratio?

The Delusion Ratio is a hypothetical metric used to quantify how much an optimistic projection (P) deviates from a realistic, risk-adjusted expected return. A Delusion Ratio of 1.0 suggests that the net optimistic gain (P – A) exactly equals the risk and time-adjusted investment base (A × V × E).

In financial planning, this calculator is often used in reverse: by setting the target ratio (D = 1.0), analysts can determine the *maximum* permissible initial cost or the *minimum* required return (P) to keep the expectation grounded in reality. Values significantly above 1.0 may indicate a highly inflated or “delusional” expectation relative to the variables involved.

How to Calculate Delusion Ratio (Example)

Let’s find the required Optimistic Return Value (P) to achieve an Ideal Delusion Ratio of 1.0, given the following:

  1. Initial Investment (A): $20,000
  2. Risk/Volatility Factor (V): 1.8
  3. Time Horizon (E): 3 Years
  4. *Missing Value: P* (Optimistic Return Value)

Using the rearranged formula ($P = (D_{ideal} \times A \times V \times E) + A$):

  1. Calculate the Risk-Adjusted Base: $20,000 \times 1.8 \times 3 = \$108,000$.
  2. Since $D_{ideal} = 1.0$, the required net gain must equal the base: $\$108,000$.
  3. Add the Initial Investment back: $P = \$108,000 + \$20,000 = \$128,000$.
  4. The required Optimistic Return Value (P) is $128,000.

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Frequently Asked Questions (FAQ)

How is the Risk/Volatility Factor (V) determined?

The Volatility Factor is subjective but should reflect market uncertainty. A stable, low-risk investment might use 1.0 to 1.2, while a highly speculative venture might use 1.8 to 2.5 or higher. It serves as a multiplier on the initial cost.

What does a Delusion Ratio of 0.5 mean?

A ratio of 0.5 means that the net gain (P – A) is only half of the risk-adjusted investment base (A × V × E). This suggests a significantly conservative projection or a low return relative to the risk and time exposure.

Can I calculate the Delusion Ratio if all four variables are known?

Yes. If you enter all four variables (P, A, V, E), the calculator will output the resulting Delusion Ratio (D). You can then compare this to the ideal 1.0 to check the consistency of your inputs.

Why is the Initial Investment (A) included in the denominator of the formula?

Including ‘A’ in the denominator ensures that the ratio scales correctly based on the size of the investment. It makes the risk-adjustment relative to the capital being deployed.

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