Your success in life is determined by the decisions you make at various points. Make theright decision and you could move forward. Make the wrong decision and you could get stuck where you are or worse still, go backward.

Unfortunately, many people have an instinctual approach towards decision making, rather than a logical approach. They tend to avoid risks at all costs and always try to opt for the ‘safe’ choice, even if it is not very profitable or effective in the long run.

The truth is that in many cases, what you perceive as a ‘risky’ choice might not be nearly as risky or dangerous as you think. Now, the question is – how do you figure it out? This is

where the concept of expected value enters the equation.

What is Expected Value?

Expected value (EV) is a statistical concept which allows you to determine the benefits and risks associated with a particular action. It can be defined as the sum or probability-weighted average of all the possible outcomes of a particular action.

To determine the expected value, you need to determine all the possible outcomes of an action, assign a value to each of those outcomes, determine the probability of each of those outcomes, and multiply the values with their respective probabilities.

How to Calculate EV?

Let us consider a game of coin-flipping, in which you stand to lose $1 if it comes up tails and win $2 if it comes up heads. In this situation, there can only be two outcomes.

There is a 50% chance you will lose $1.

• 50% ($1) = $0.50 (negative expected value)

There is a 50% chance you will gain $2.

• 50% ($2) = $1 (positive expected value)

To arrive at the actual expected value, you need to add these two together (-0.5) and (+1), which is $0.50. In other words, your expected profit from the bet is $0.50. If you take the bet 100 times in a row, you stand to gain $50. So, it is a profitable proposition for you.

Now, let us say the coin is rigged. It flips heads 40% of the time and tails 60% of the time. You stand to gain $100 if it flips heads and lose $50 if it flips tails.

• 40% ($100) = $40 (positive expected value)
• 60% ($50) = $30 (negative expected value)

The overall EV is $10, which is what you stand to make if you take the bet. Again, it is a profitable proposition for you in the long run.

The Role of EV in Business Decisions

The concept of EV is routinely used by businesses to determine if a particular decision is likely to pay off in the long run or not. For instance, music streaming services and antivirus software companies usually offer free trial periods for their customers. These companies take into account various factors – the cost of the free trial, the likelihood of a customer upgrading to the paid version, and the total profit that can be generated from a customer who opts for the paid version.

If the profit to be made from customers who open the window for paid versions is more than the money spent on free trials, then it is a sound business strategy. If the costs outweigh the profits, the company needs to find a way to reduce the costs associated with the free trial or scrap the offer altogether.

Applying EV in Real Life

You could apply the concept of expected value for many things in your everyday life – while making an investment in the stock market, playing a game of poker, deciding whether or not to quit your job and start your own business venture, and so many more.

In each of these situations, you need to keep your built-in biases, prejudices, and emotions aside and make a purely mathematical, logical decision by applying the EV concept. It is not easy to do so, as many of us are hardwired to avoid risks at any cost, but you can practice it and perfect it over time. Once you do, you will be able to decide things in life based on their long term pay-off or profitability, rather than looking each and everything through the prism of risk alone.

Simply put, thinking in terms of expected value is a habit of winners. It can bring you more success in your personal and professional life, reduce the risk of failure associated with your actions, and help you develop a confident and positive approach towards life.