Expected Value

Multiply the profit of a situation with its likelihood to get the expected value.

For example, if you gain 1 the expected value is ($2 * 50%) - $1 = $0.

The formula is:


  • – the expected value
  • – the probability of the event
  • – the event

Expected Value can be a helpful reference when dealing with uncertainties. It can lead to unexpected results, when dealing with Fat-tailed distributions: Often very unlikely options might be worth pursuing because their payoff is so high.