Which statement best defines the expected value (EV) in decision analysis?

Which statement best defines the expected value (EV) in decision analysis?

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

Answer: (B)

Expected value in decision analysis is the probability-weighted average of all possible outcomes. To get it, multiply each possible payoff by its probability, then add those products together. This gives the average payoff you would expect if you could repeat the decision many times under the same chances. It captures both how big the outcomes can be and how likely each is, which helps when comparing options under uncertainty. The most likely outcome ignores the potential for more profitable but less probable results. Simply summing all outcomes without weighting by probability treats every outcome as equally likely, which isn’t realistic. Focusing on the maximum possible profit highlights the best-case scenario and ignores the chances of not achieving it and other less favorable outcomes.

Expected value in decision analysis is the probability-weighted average of all possible outcomes. To get it, multiply each possible payoff by its probability, then add those products together. This gives the average payoff you would expect if you could repeat the decision many times under the same chances. It captures both how big the outcomes can be and how likely each is, which helps when comparing options under uncertainty.

The most likely outcome ignores the potential for more profitable but less probable results. Simply summing all outcomes without weighting by probability treats every outcome as equally likely, which isn’t realistic. Focusing on the maximum possible profit highlights the best-case scenario and ignores the chances of not achieving it and other less favorable outcomes.