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Chapter 6

2.2 Strengths and weaknesses of EVs

Deals with multiple outcomes. Subjective probabilities.

Quantifies probabilities. Answer is only a long-run average.

Relatively simple calculation. Ignores variability of payoffs.

Assists decision making. Risk neutral decision, i.e. ignores
investors’ attitudes to risk.

EVs are appropriate to use when:

 there is a reasonable basis for making the forecasts and estimating the
probabilities of different outcomes

 the decision is relatively small in relation to the business, so the risk is small in
magnitude

 the decision is for a category of decisions that are often made

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