EXPECTED MONETARY VALUE
Photo by Naser Tamimi on Unsplash Suppose there are two investment options available to you. You will spend the same price for both options. For example, you need to deposit $100,000 for options A and B. If you choose investment A, the probability of making a profit of $60.000 at the end of one year is 40%. If you choose investment B, the probability of making a profit of $40.000 at the end of one year is 60%. Which option do you prefer? The tool we use when choosing options with probabilities is called Expected Monetary Value. It is a simple mathematical operation that needs to be done in the example above. For Option A: 60.000 * 40% = $24,000 For Option B: 40.000 * 60% = $24,000 The resulting $24,000 is called the Expected Monetary Value. This shows us that there is no difference between the two investment options. In summary; Impact Power * Probability indicates the amount of return we should expect from that investment. This simple technique is interestingly involv...