Expected Value

Questions

What is Expected Value?

Expected value is what a decision is worth on average if you could repeat it many times. Multiply each possible outcome by its probability and add them up. It lets you compare choices on their long-run merits rather than on hope or fear.

How do you use Expected Value?

To use it, check whether offers like warranties are worth their price, and take small bets with big upsides. But remember its limits: it assumes many tries and treats every dollar alike, so when ruin is possible, weigh survival first.

When does Expected Value matter?

Expected Value is one of the 32 mental models for risk, the situations where you ask: What could go wrong, and what will I do if it does? Within that, it belongs to “Thinking in odds”, alongside Fat-Tailed Distributions, Foxes vs Hedgehogs and Law of Large Numbers.

What is an example of Expected Value?

Two stories show it at work: The St Petersburg puzzle (1713–1738) and Cash WinFall (2005–2012). Both are told in full in The Mental Models Daily Almanac, which has two stories for each of its 365 models.

Which mental models are related to Expected Value?

Utility Values, Law of Large Numbers and Loss Aversion. Expected Value itself comes from statistics and probability.