Expected monetary value is a probability-based value that considers all possible monetary outcomes of a situation. It is calculated by multiplying the percentage of each possibility by the monetary gain or loss associated with that outcome. This tool is useful for decision-making and risk management assessments.
The expected monetary value is a probability-based value that takes into account all possible monetary outcomes of a given situation. The value is arrived at by multiplying the percentage of each possibility that occurs by the monetary gain or loss associated with that outcome. At that point, all those values, positive and negative, combine to reach the expected monetary value. This calculation is a valuable tool for those tasked with making a decision involving several possible outcomes, as it represents the most statistically accurate estimate of the final outcome.
The ideal situation to make a decision would be to know the result before making the decision, especially when it comes to money. Since that is not the case, calculating the expected monetary value is a good way to arrive at the most informed monetary decision possible. It is an especially valuable tool for risk management assessments because of the way it takes into account all possible scenarios in a given decision.
For example, a company is faced with two possible alternatives. Option A would give you one chance in ten at $1,000 UD Dollars (USD), with no financial reward the other nine times out of ten. The $1,000 USD will be multiplied by the 10 percent chance of that outcome occurring for a total of $100 USD. Since the other nine possible outcomes come with no monetary gain or loss, that $100 would be the expected monetary value of option A.
In option B, there is a 50 percent chance of a $2,000 gain and a 50 percent chance of a $500 loss. To calculate expected value here, $2,000 would be multiplied by 0.50 for a profit of $1,000, and negative-$500 would be multiplied by 0.50 for a loss of $250. Add $1,000 to the Negative- $250 produces an expected money value for Option B of $750 USD, making it the more preferable of the two options by this standard.
If there is a cost associated with the elections in a particular circumstance, these must also be taken into account. In the above example, if there were a sum of $700 to take Option B, the expected monetary value would have dropped to just $50 USD, falling below the expected return of Option A. In risk management, these calculations they are often used in conjunction with decision trees, which place all the options and expected values side by side in simple diagrams to clearly delineate the risks and opportunities associated with all possible options.
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