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EXPECTED VALUE

Expected value is the fundamental principle of decision analysis.  The concept is thought to have first originated in the 17th century. The theory was developed largely because of a desire to understand gambling odds.

Expected Value:  the probability-weighted average of all possible outcomes of a chance event.

Notations often used:

    E(x), EV, EMV, m (Greek letter mu)

The mean statistic is exactly equivalent.

EMV = expected monetary value if the context is monetary value.  This is usually calculated EMV = EV net present value.

This concept is the cornerstone of Decision Analysis.


EMV Decision Rule

If the objective is to maximize the EMV of the company, then the optimal decision policy is to choose the alternative having the highest EMV.

Increasingly, private companies and government organizations are adopting the EMV decision rule as the principal basis for their decision making.

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