How to calculate expected value probability
The expected value is a crucial concept in probability and statistics that enables people to make informed decisions based on risks and rewards. The expected value represents the long-term return from a particular decision, making it an essential tool for various disciplines, including economics, finance, and game theory. This article will guide you through the process of calculating expected value probability to help you make better-informed choices.
Step 1: Understanding Expected Value and Probability:
To calculate the expected value probability, first, we need to understand these two important concepts:
1) Expected Value (EV): The expected value is defined as the weighted sum of possible outcomes where the weights are probabilities. In other words, it gives us a numerical value representing the “average” or “most likely” outcome when an experiment is conducted numerous times.
2) Probability: Probability is a measure of how likely an event or outcome will occur compared to all possible outcomes. It’s usually represented as a number between 0 (impossible) and 1 (certain).
Step 2: List Possible Outcomes and Probabilities:
To begin calculating expected value probability, list all possible outcomes of an event and their corresponding probabilities. For example, in a simple dice roll, there are six possible outcomes (1-6), each with a probability of 1/6.
Step 3: Multiply Outcomes by Corresponding Probabilities:
Next, multiply each outcome by its corresponding probability. Using our dice example:
(1)(1/6) + (2)(1/6) + (3)(1/6) + (4)(1/6) + (5)(1/6) + (6)(1/6)
Step 4: Calculate the Expected Value:
Now, add up all of the results obtained in step 3 to get your overall expected value:
Expected Value (EV) = (1/6) + (2/6) + (3/6) + (4/6) + (5/6) + (6/6)
Expected Value (EV) = 3.5
The expected value of rolling a fair six-sided dice is 3.5. This means that over numerous dice rolls, the “average” roll value will be around 3.5.
Conclusion:
Calculating expected value probability is an invaluable skill for predicting the outcome of events and making informed decisions based on risk assessments. By understanding these concepts and following the steps outlined in this article, you can effectively apply this knowledge to various real-life situations.