How to calculate expected value

Have you ever found yourself at a crossroads while deciding between multiple options? Perhaps you’re contemplating whether to invest in a new venture, bet on a sports game, or make a choice between different job offers. In such scenarios, understanding the potential outcomes and their likelihoods can help clarify your decision. This is where the concept of expected value comes into play, offering a mathematical approach to evaluate what you could realistically expect to gain (or lose) from your choices.

The expected value (EV) is calculated by multiplying each possible outcome by the probability of that outcome occurring and then summing all of those values. In formula terms, EV = Σ (Probability of Outcome × Value of Outcome).

To calculate expected value, follow these steps: First, identify all possible outcomes of your decision and assign a numerical value to each outcome based on its potential impact. Next, determine the probability of each outcome occurring, typically expressed as a percentage or decimal. Once you have the values and probabilities, multiply each outcome’s value by its respective probability. Finally, sum all these products to arrive at the expected value. This gives you a single figure that represents the average value you can expect if you were to repeat the decision-making process many times. Utilizing expected value can greatly enhance your decision-making framework by allowing you to weigh various options more quantitatively, rather than relying on gut feeling alone.