Expected Value Overview and Applications

What is the expected value (EV) of profit for Project A?

Which project has a higher expected value of profit?

What is one limitation of using expected values in decision making?

Which aspect is NOT considered when calculating expected values?

What is the minimum profit guaranteed by Project A?

What is the expected value (EV) if a transistor is defective with a probability of 0.02 in a batch of 2,000 transistors?

How is the expected value for daily sales determined in the given example?

In a scenario with three possible outcomes for investment, what does a positive expected value indicate?

What is the expected daily sales for product T when the probabilities for different units sold are accounted for?

Which of the following is part of the expected value equation?

If a businessman evaluates a project and finds expected profits to total P30,000, what should be his likely decision?

In calculating expected value for sales, what is the overall process of multiplying sales outcomes with probabilities called?

What does the probability of an outcome reflect in the context of expected value analysis?

Expected Value

Expected Value (EV) is a weighted average value based on probabilities.
EV calculation: For a single event with probability, p, the expected number of times that outcome occurs in events is: n x p (where n is the number of events)
Example: Probability of a transistor being defective is 0.02, in a batch of 2,000 transistors, EV = 2,000 x 0.02 = 40 defectives.
EV equation: EV = Σnp (where Σ represents the sum of, n represents the outcome, and p represents the probability of the outcome occurring)

Expected Value Applications

Daily Sales Example: To calculate expected daily sales, multiply each possible outcome (sales units) by its probability.
Investment Decision Example: Calculate expected profit by multiplying profit/loss for each outcome by its probability, then sum the results.
Expected values guide decision-making:
- A project with a positive EV should be accepted.
- A project with a negative EV should be rejected.
- Select the option with the highest EV of profit or the lowest EV of cost.
EV Decision Rule: Choosing the option with the highest EV of profit might not always be the safest choice, as it may have a higher risk of loss compared to an option with a lower EV of profit but a smaller risk of loss.

Limitations of Expected Values

Probability Estimates: Probability values used in EV calculations are often estimates, which can be inaccurate or unreliable.
Risk Tolerance: EV analysis doesn't consider individual risk tolerance.
Time Value of Money: EV doesn't always consider the time value of money, where a larger sum in the future is worth less than the same sum received today.

This quiz explores the concept of Expected Value (EV), including its calculation and practical applications in decision-making. Participants will learn how to compute EV through examples and understand its implications for sales and investments. Test your understanding of EV and its significance in probability and statistics!