1. What is Expected Value?

Expected Value (EV) is a fundamental concept in probability and decision-making that represents the average outcome if an action is repeated multiple times. For small-medium businesses, it helps quantify the potential value of business decisions considering both rewards and risks.

2. How Does the Calculator Work?

The calculator uses the Expected Value formula:

Where:

• \( P \) — Probability of success (0 to 1)
• \( Reward \) — Potential financial gain ($)
• \( Risk \) — Potential financial loss ($)

Explanation: The equation calculates the net expected value by multiplying the probability of success by the potential reward, then subtracting the potential risk.

3. Importance of EV Calculation

Details: EV calculation helps SMBs make data-driven decisions by quantifying potential outcomes. A positive EV suggests a potentially favorable decision, while negative EV suggests the opposite.

4. Using the Calculator

Tips: Enter probability (between 0 and 1), potential reward in dollars, and potential risk in dollars. All values must be non-negative, with probability between 0-1.

5. Frequently Asked Questions (FAQ)

Q1: What does a positive EV mean?
A: A positive EV suggests that, on average, the decision would yield a net gain if repeated multiple times.

Q2: How accurate is EV for one-time decisions?
A: EV represents long-term averages. For one-time decisions, consider both EV and risk tolerance.

Q3: Should I always choose the option with highest EV?
A: Not necessarily. Consider your risk tolerance, financial situation, and other qualitative factors.

Q4: How to estimate probability for business decisions?
A: Use historical data, market research, or expert opinions. For new ventures, consider scenario analysis.

Q5: Can EV be used with non-financial outcomes?
A: Yes, but you need to quantify outcomes (e.g., assign values to customer satisfaction, brand impact).