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Chapter 14

Dealing with risk in decision making

5.1 Expected value

An expected value summarises all the different possible outcomes by calculating a
single weighted average. It is the long run average (mean).

p =
the probability of the
outcome occurring
future outcome

EV = ∑px

EV (Expected x =
value) the future outcome

= long run
weighted
average

5.2 Problems in using expected values

 Probabilities are subjective.

 Little meaning for a one-off project.

 Ignores attitudes to risk.

 The answer may not exist.

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