We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Economy

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is an Expected Monetary Value?

Jim B.
By
Updated: May 16, 2024
Views: 18,297
Share

Expected monetary value is a value based on probability that factors in all possible monetary outcomes of a given situation. The value is reached by multiplying the percentage of each possibility occurring by the monetary loss or gain associated with that outcome. At that point all of those values, positive and negative, are combined to reach the expected monetary value. This calculation is a valuable tool for those tasked with making a decision involving several possible outcomes, as it represents the most statistically accurate estimation of the eventual result.

The ideal situation in making a decision would be to know the outcome before the decision is made, especially when it comes to ones involving money. Since that isn't the case, calculating the expected monetary value is a good way to come to the most informed monetary decision possible. It's an especially valuable tool for risk management assessments because of the way it takes into account all possible scenarios in a given decision.

For example, a company is faced with two possible alternatives. Choice A would give it a one in ten shot at $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 percent chance of that outcome occurring for a total of $100 USD. Since the other nine possible outcomes come with no monetary gain or loss, that $100 USD would be the expected monetary value of choice A.

In choice B, there is a 50 percent chance of a $2,000 USD gain and a 50 percent chance of a $500 USD loss. To calculate the expected value here, $2,000 USD would be multiplied by 0.50 to get a gain of $1,000 USD, and negative-$500 USD is multiplied by 0.50 for a $250 loss. Adding the $1,000 USD to the negative-$250 yields an expected monetary value for choice B of $750 USD, making it the more preferable of the two choices by this standard.

If there is a cost attached to choices in a particular circumstance, they must be taken into account as well. In the example above, had there been a $700 attached to making choice B, then the expected monetary value would have dropped to just $50 USD, dropping it below the expected yield of choice A. In risk management, these calculations are often used in tandem with decision trees, which lay all of the choices and expected values next to each other in simple diagrams to clearly delineate the risks and opportunities associated with all possible choices.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Jim B.
By Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own successful blog. His passion led to a popular book series, which has gained the attention of fans worldwide. With a background in journalism, Beviglia brings his love for storytelling to his writing career where he engages readers with his unique insights.
Discussion Comments
By SkyWhisperer — On Nov 17, 2011

@everetra - That’s good to know, however I think you’re missing something. Expected monetary value uses probability and in your example there is no probability.

You don’t know the likelihood that a stock will swing up or down. I think a better expected monetary example is the online betting markets.

They pool together the wisdom of masses of investors who bet on different outcomes, and their bets create probabilities for those events. I don’t recommend betting of course, but I think it’s a better illustration.

By everetra — On Nov 16, 2011

I think expected monetary value analysis is standard operating procedure for anyone investing in stocks or other securities. Many people don’t realize you can determine maximum profit and maximum loss on a stock, by setting stop limit orders.

You could buy 100 shares of a stock at $10 per share, making your investment $1,000. Maybe you don’t want to lose more than 25% of that investment, however, so you set a stop limit sell order of $7.50.

If the stock drops below that value, it will sell automatically. You can also set an order on the upside as well. Maybe you want to automatically “cash in your chips” so to speak if the stock hits $20 a share; you can set a limit order on that as well.

In this way, you can calculate how much you can profit or lose on the transaction.

Jim B.
Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own...
Learn more
Share
https://www.smartcapitalmind.com/what-is-an-expected-monetary-value.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.