What is “Expected Value†in Personal Finance? Before this I never heard and know about these words, but not after reading “Expected Value : the Lottery and Insurance†from Retire At 30.
What is “Expected Value�
Expected value is the sum of (the value of each possible outcome * the probability of getting that outcome). But that is likely not clear at first.
Expected value is best explained using an example:
If you and five buddies put $1 each into a pot and then draw straws to take home all of it, what is your expected value of this game?
The good outcome:
What is the probability you’ll get the pot assuming the game is not fixed and completely random? Answer: 1 in 5
What will you get if you win the pot? Answer: $5The bad outcome:
What is the probability you’ll get nothing? Answer: 4 in 5
What will you get if you get nothing? Answer $0The expected value is then: (.2 * $5) + (.8 * $0) = $1. You get $1 because nobody is taking a profit from this game.
In further, TT from Retire At 30 also giving some explanation on lottery and insurance. You may read the full article here
Source : Retire At 30
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