Expected Value

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

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

The formula is: $EV=\sum P(X_i)\ast X_i$

Where:

• $EV$ – the expected value
• $P(X_i)$ – the probability of the event
• $X_i$ – 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.

Tools

Guesstimate