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Business represents

The importance of having an expectation, like for example in a game is that it can be used to evaluate which option you should choose to maximize gains and minimize losses. It excludes variables like fun or personal satisfaction. Expected Value (EV) is essentially a positive or negative indicator that should guide you in making the best decision. The Expected Value in business represents the amount that is predicted to be gained, using the calculation for average expected payoff.

The average expected pay off is an estimate of the amount that will be gained in a game of chance, calculated by multiplying the probability of winning by the number of points won each time. An expected value of zero means that it is a “fair game” which means that the expected return should equal what you pay in. Formula: Expected value (EV) = wager + (expected win – expected loss) Example: A common application of expected value is gambling. For example, an American roulette wheel has 38 places where the ball may land, all equally likely.

A winning bet on a single number pays 35-to-1, meaning that the original stake is not lost, and 35 times that amount is won, so you receive 36 times what you’ve bet. Considering all 38 possible outcomes, the expected value of the profit resulting from a dollar bet on a single number is the sum of what you may lose times the odds of losing and what you will win times the odds of winning, that is, The change in your financial holdings is ? $1 when you lose, and $35 when you win. Thus one may expect, on average, to lose about five cents for every dollar bet, and the expected value of a one-dollar bet is $0. 9474.

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