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expected value| In decision-making, the average value of the outcomes, weighted by the possibilities of achieving them. |
| If stock A pays out once in every four times, at ten points, and stock B pays out once in every two times, at six points, it is possible to use the expected value to determine which stock should be purchased, by looking at the expected performance over a set period of time, say 100 days. In this given time period, stock A will pay out 250 points, or an average of 2.5 points per day (10 pts × 100 days / 4 - 250). Stock B will pay out 200 points, an average of just 2 points per day (4 pts × 100 days / 2 - 200). According to these expected values, it is stock A that should be purchased for the best expected return. |
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