# What is an expected monetary value?

Expected monetary value is a probability-based value that takes into account all possible monetary outcomes of a given situation. The value is reached by multiplying the percentage of each chance that occurs by the monetary gain or loss associated with that outcome. At this point, all these values, positive and negative, are combined to arrive at the expected monetary value. This calculation is a valuable tool for those tasked with making a decision involving multiple possible outcomes, as it represents the most statistically accurate estimate of the final outcome.

The ideal situation to make a decision would be to know the outcome before making the decision, especially when it comes to money. Since this is not the case, calculating the expected monetary value is a good way to arrive at the most informed monetary decision possible. It is an especially valuable tool for risk management assessments, as it takes into account all possible scenarios in a given decision.

For example, a company is faced with two possible alternatives. Option A would give you a one in ten chance on \$1,000 UD Dollars (USD), with no financial reward the other nine times out of ten. The \$1,000 USD would be multiplied by the 10% chance of that outcome occurring for a total of \$100 USD. Since the other nine possible outcomes bring no monetary gain or loss, the expected monetary value of Option A would be \$100.

In option B, there is a 50% chance of a gain of \$2,000 and a 50% chance of a loss of \$500. To calculate the expected value here, \$2,000 USD would be multiplied by 0.50 for a gain of \$ 1,000 USD, and negative \$500 USD would be multiplied by 0.50 for a loss of \$250. Negative: \$250 produces an expected monetary value for Option B of \$750 USD, making it the more preferable of the two options for this pattern.

If there is a cost associated with elections in a given circumstance, these must also be taken into account. In the example above, if there was a sum of \$700 for Option B, the expected monetary value would have been reduced to just \$50 USD, falling short of the expected return on Option A. In risk management, these calculations are often used​ ​in conjunction with decision trees, which place all options and expected values ​​side by side in simple diagrams to clearly delineate the risks and opportunities associated with all possible options.

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