2017-02-15 00:00:00Decision MakingEnglishLearn what expected value is, how it can be calculated, and how to use it in making business decisions.https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/06/Own-Boss-Considering-Expected-Value.jpghttps://quickbooks.intuit.com/ca/resources/decision-making/expected-value/Expected Value

Expected Value

1 min read

Expected value is a statistical concept that can be utilized to make better business decisions. The expected value is the anticipated value of a given investment, scenario, or outcome. It is calculated by multiplying each possible outcome by the likelihood of that outcome occurring and then adding up those results. As a basic example, imagine a six-sided die, with values of 1 through 6. If a person rolls the die, the probability of each side landing face-up is one-sixth. To find the expected value of a single roll, multiply each outcome by its probability and sum them:(1/6) x 1 + (1/6) x 2 + (1/6) x 3 + (1/6) x 4 + (1/6) x 5 + (1/6) x 6 = 3.5. With equally likely outcomes, the expected value is the average of all values. Business owners can use this concept to make decisions about which projects to pursue. A higher expected value means a better project.

For example, imagine the following two projects:

Project A: 10% chance of making $100,000, 40% chance of making $20,000, 50% chance of making $15,000

Project B: 10% chance of making $175,000, 40% chance of making $15,000, 50% chance of making $5,000

The expected values are calculated as:

Project A (EV) = (0.1 x $100,000) + (0.4 x $20,000) + (0.5 x $15,000) = $25,500

Project B (EV) = (0.1 x $175,000) + (0.4 x $15,000) + (0.5 x $5,000) = $26,000

Project B has the higher expected value and should be chosen.

References & Resources

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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