Glossary
Expected value
M6.03 · M9.01Also called probability weighted value, probability-weighted outcome.
The probability-weighted average of outcomes.
A share with a 25% chance of ₹1,400, a 50% chance of ₹1,000 and a 25% chance of ₹400 has an expected value of ₹950.
Thinking this way converts an argument about what will happen into a statement about a distribution, which can be examined. It also exposes asymmetry: a position whose upside is three times its downside is attractive at even odds and unattractive if the downside is four times as likely.
The discipline is writing the probabilities down before the outcome, so that judgement can be scored afterwards.