Expected value
Also called: EV, probability-weighted average
The average result of a decision if it could be repeated many times, found by weighting each outcome by its probability.
Expected value = the sum of each possible outcome multiplied by its probability. It describes the long-run average, not what will happen in any single case.
A positive expected value is not enough on its own: if one outcome is a catastrophic loss, the decision can still be a bad one.
Example
A ₹100 bet with a 1 in 1,000 chance of ₹50,000 has an expected value of 0.001 × 50,000 − 100 = −₹50.
Learn more in these lessons
- Probability and expected valueWhat is expected value, and why does it matter for investing?
- Sensitivity and scenario analysisHow do you show how uncertain a valuation is?
- Expectancy, losing streaks and risk of ruinCan a strategy that wins most of the time still lose money?
- Good decisions and good outcomesDoes a profitable investment prove it was a good decision?
- Building scenarios from assumptionsHow do you value a company when the future is uncertain?
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