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  • Decision Making With Probabilities: Expected Value Approach

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    Timothy james Palermo
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    The document discusses using an expected value approach for decision making under uncertainty. The expected value approach calculates the expected return of each decision by multiplying the payoff for each possible outcome by its probability and summing the results. The decision with the highest expected value, or best expected return, should then be chosen. The expected value of a decision is defined as the sum of the weighted payoffs, with the weight being the probability of each possible outcome.

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    The document discusses using an expected value approach for decision making under uncertainty. The expected value approach calculates the expected return of each decision by multiplying the payoff for each possible outcome by its probability and summing the results. The decision with the highest expected value, or best expected return, should then be chosen. The expected value of a decision is defined as the sum of the weighted payoffs, with the weight being the probability of each possible outcome.

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    6 views1 page

    Decision Making With Probabilities: Expected Value Approach

    Uploaded by

    Timothy james Palermo
    The document discusses using an expected value approach for decision making under uncertainty. The expected value approach calculates the expected return of each decision by multiplying the payoff for each possible outcome by its probability and summing the results. The decision with the highest expected value, or best expected return, should then be chosen. The expected value of a decision is defined as the sum of the weighted payoffs, with the weight being the probability of each possible outcome.

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    Decision Making with Probabilities

    Wednesday, September 7, 2022 4:40 AM

    Decision Making with Probabilities

    Expected Value Approach


    If probabilistic information regarding the states of nature is available, one may use the
    expected value approach (EV).

    The expected return for each decision is calculated by summing the products of the payoff
    under each state of nature and the probability of the respective state occurring.

    The decision yielding the best expected return is chosen.

    Expected Value of a Decision Alternative


    The expected value of a decision alternative is the sum of weighted payoffs for the decision
    alternative.
    The expected value (EV) of decision alternative di is defined as:

    Pre-mid coverage Page 1

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