Which option best describes the expected value in decision analysis?

Which option best describes the expected value in decision analysis?

• A. The maximum possible profit
• B. The sum of all outcomes
• C. A weighted average, based on probabilities
• D. The most likely outcome

Answer: (C)

Expected value is the probability-weighted average of all possible outcomes. It represents what you would expect to receive on average if the decision could be repeated many times, so you combine each possible result with how likely it is. To get it, multiply each outcome by its probability and sum these products. This differs from simply taking the maximum possible profit, the sum of all outcomes, or the single most likely result. For example, if there’s a 50% chance of earning 100 and a 50% chance of earning 0, the expected value is 50. In decision analysis, you compare options by their expected values to guide choices, though a higher EV doesn’t guarantee a better single outcome due to risk and variability.

Expected value is the probability-weighted average of all possible outcomes. It represents what you would expect to receive on average if the decision could be repeated many times, so you combine each possible result with how likely it is. To get it, multiply each outcome by its probability and sum these products. This differs from simply taking the maximum possible profit, the sum of all outcomes, or the single most likely result. For example, if there’s a 50% chance of earning 100 and a 50% chance of earning 0, the expected value is 50. In decision analysis, you compare options by their expected values to guide choices, though a higher EV doesn’t guarantee a better single outcome due to risk and variability.