Expected Value is a statistical concept that represents the predicted value of a random variable. It’s essentially a weighted average of all possible values, where the weights are the probabilities of each value occurring.
Process
- Identify all possible outcomes: Determine all the potential results of an event.
- Assign probabilities: Determine the probability of each outcome occurring.
- Calculate the product: Multiply each outcome by its probability.
- Sum the products: Add up all the results from step 3.
Formula:
Expected Value (EV) = Σ (Outcome * Probability)
Applications:
- Gambling: To analyze the fairness of games.
- Investments: To evaluate the potential return of an investment.
- Insurance: To determine premiums.
- Decision making: To weigh the potential outcomes of different choices.
While expected value provides a useful tool for analysis, it doesn’t guarantee the actual outcome. It’s a long-term average and doesn’t predict what will happen in a single instance.