EMV is a balance of probability and its impact over the range of possible scenarios. If you have to make a decision between two scenarios, which one will provide the greater potential payoff?
Scenario 1
| Best case provides a 20% probability of making $180,000 | BC = 20% | X $180,000= $36,000 |
| Worst case provides a 15% probability of loosing [-$20,000] | WC = 15% | X(-$20,000) =(-$3,000) |
| Most likely case provides a 65% probability of making $ 75,000 | MLC = 65% | X $75,000 = $48,750 |
Total Expected Monetary Value 100% $81,750
Scenario 2
| Best case provides a 15% probability of making $200,000 | BC=15% | X $200,000 =$30,000 |
| Worst case provides a 25% probability of making $15,000 | WC= 25% | X $ 15,000 = $ 3,750 |
| Most likely case provides a 60% probability of making $45,000 | MLC=60% | X $45,000 = $27,000 |
Total Expected Monetary Value 100% $60,750
Which scenario do you choose? Number one, because it has the highest EMV, or $81,750
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