Expected Value
- The weighted average of payoffs or values resulting from all the possible outcomes.
- The probabilities of every outcome are used as weights
- Expected value measures central tendency; payoff or value expected on an average
- An Example
- Investment in drilling exploration:
- The outcomes that are possible is two
- Success -- stock price increase from $30 to $40/share
- Failure -- stock price decrease from $30 to $20/share