Expected value is a statistical concept that helps predict the future outcomes of a decision based on probability. In business, it’s widely used for preparing forecasts, risk management, and decision-making. In this article, we’ll walk through the steps to calculate expected value using Microsoft Excel.

Step 1: Organize Your Data

Before calculating the expected value in Excel, it’s essential to organize your data into two columns – one representing outcomes (values) and the other their respective probabilities. Ensure the probabilities add up to 1 (or 100%). For example:

| Outcome (Value) | Probability |

|—————–|————-|

| $100            | 0.3         |

| $200            | 0.5         |

| -$50            | 0.2         |

Step 2: Calculate Outcome * Probability

Now, create a new column next to Probability titled “Outcome * Probability.” Here, you will multiply the outcome by its corresponding probability.

=Outcome_cell * Probability_cell

Do this for each row of your data.

Step 3: Sum the Resultant Values

To find the expected value, you need to sum all the values in the “Outcome * Probability” column.

=SUM(Resultant_values_range)

For example:

=SUM(C2:C4)

Step 4: Interpret the Expected Value

The result gives you an insight into the expected average result of a particular decision or event occurring over time. In our example, if you were evaluating an investment option with the given probabilities and outcomes, your expected return would be the calculated expected value.

Conclusion:

Calculating expected value in Excel is simple and provides valuable insights into potential future outcomes. By following these steps, you can make more informed decisions about investments, business strategies, and risk management strategies based on probability and outcomes.