In this post, we’ll unpack all you need to know about Expected Value, defining exactly what it is, why it’s important, how to calculate it, how to leverage it and more.
What Is Expected Value?
Expected Value (EV) is a formula for calculating the average outcome of an event over the long term.
Why It’s Important
EV provides a framework for evaluating potential outcomes and assessing risk. It allows us to make more informed decisions by relying on a more systematic, data-driven approach.
How To Calculate It
To calculate Expected Value, simply multiply each possible outcome by its probability and then sum the values.
For example, in a game where there’s a 50% chance to win $100 and a 50% chance to lose $50, the EV would be calculated as:
EV = (0.5×100) + (0.5×−50) = 25
This means that, on average, you can expect to win $25 per game over the long term.
How To Leverage It
The key to leveraging Expected Value is to consistently make decisions that maximise outcomes with positive EV over the long term, even if individual results may vary in the short term. In doing so, you will maximise gains and minimise losses.
Summary (TL;DR)
Expected Value is a formula used to calculate the average outcome of an event over the long term, based on the probabilities of different outcomes.
EV is calculated by multiplying each possible outcome by its probability and then summing the values.
The key to leveraging EV is to maximise the selection of options with positive EV over the long term. This applies even if individual results may vary in the short term.
