What is Expected Value and How to Use it in Business?

Mallika Khandelwal

24th May'23
What is Expected Value and How to Use it in Business? | OpenGrowth

The expected values are used to forecast the future of an investment. The expected values are used when no real-time data is available. Then you need the probabilities to forecast the outcome. The Expected values provide the data to take the decision about the investments. You can make a secure decision regarding the expected values forecast. The expected value calculator works in the direction of estimating the real-time values of an investment outcome. You can cope with the condition of uncertainty by knowing the probable solution to the outcomes. The expected values eliminate the condition of uncertainty and you can make a decision in a certain condition.

 

The Purpose of Expected Value:

The expected value is a simple way to find the return on your investments. All you need to do is draw the values against all the possibilities. When real-time data is not available about a marketplace, then the EV is the best solution to forecast the return on the investments. The expected values make it possible for the investor to know the probable outcome of their investments. When there is no data available about a market place then the expected value estimation is the best answer to this situation. The expected value can be used by the individual and the organizational level. The expected value calculator makes it possible to draw the outcome of the probable situations.

 

How to calculate the expected value?

Consider in a fashion store the customers are expected to come 20,30,40,50 and the probabilities of those customers are 0.4, 0.3, 0.2, 0.1, we draw the expected values of the customer and their probable values. The expected values conclude the probabilities of all the expected customers. Here we are using the expected value calculator to find all the expected values.

 

Given:

The daily expected customer in a fashion store = 20,30,40,50

The probabilities of clients in a fashion store = 0.4, 0.3, 0.2, 0.1

Solution:

Expected Value Table

x

P(x)

x * P(x)

20

0.4

8

30

0.3

9

40

0.2

8

50

0.1

5

∑ xi = 140

∑ P(xi) = 1

∑ xi * P(xi) = 30

 

Solution:

The expected value E(X) of a discrete random variable of all the expected values of the X:

The expected value formula is given by:

E(X) = μX = ∑ [ xi * P(xi) ]

Multiply the daily customers at the fashion store and their probable values.

E(X) = ( 20 ) * ( 0.4 )+( 30 ) * ( 0.3 )+( 40 ) * ( 0.2 )+( 50 ) * ( 0.1 )

Add all the values:

E(X) = ( 8 )+( 9 )+( 8 )+( 5 )

The daily expected customers in the fashion store

E(X) = 30

The expected values of the clients are E(X) = 30, which means you can expect around 30 clients daily in the fashion store. The expected value calculator can be used to find all the expected values against the probable values. In the above example, being the owner of the fashion store the average number expected is “30”, so you need to prepare at least 30 clients daily. You can manage your activities accordingly to the expected values.

 

Real-Time Example of Expected Values:

 

The expected values estimates are used to take the real-time decision-making:

  • The expected values can be used to find the alternative when you are sure about the possible outcomes.

  • You can draw the conclusion by multiplying the probabilities with the scenarios that can help to make effective decision making.

  • Generating alternatives can be easy by estimating the Expected values of the outcomes.

 

Takeaway:

The expected value is the best solution to make a decision when there is no real-time data available. You can draw the expected values of all the probabilities and can make a decision. In the example above we have concluded that 30 clients are expected daily in the fashion store. It would assist you to establish services that can serve at least 30 clients per day. This measurement is critical for investment and generating the alternative. You can be sure when taking alternatives in a condition of uncertainty or being unable to draw conclusions.

 

OpenGrowth is constantly looking for innovative and trending start-ups in the ecosystem. If you want more information about any module of OpenGrowth Hub, let us know in the comment section below.

 

Mallika is incredibly passionate about all things in life. Hailing from the small town of Rajnandgaon, Chhattisgarh, she completed her schooling and had a bachelor's degree in engineering in Information Technology. Working in and around startups, she gained experience in Search Engine Optimization, Digital Marketing and Email Outreach. Currently, She is working as a Search Engine Optimization Associate at OpenGrowth, and is focusing on building her career in this very profound field and ...

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