What is Expected Value?
Statistics texts call it the mean of a probability distribution and describe it as a long-run average over many repetitions under the same conditions. It is not the most likely outcome, need not be a possible outcome, and is not a promise: a single result can be far from it. Academy's trading case uses the same idea under the name expectancy, measured in R per trade.
Also called expectation, mean of a probability distribution, expectancy
Expected value = the sum, over every possible outcome, of (outcome × its probability); the probabilities add up to 1
Warranty cost per repair (illustrative)
- Claim, probability 10%
- $250
- No claim, probability 90%
- $0
- Expected cost
- 0.9 × 0 + 0.1 × 250 = $25No single repair costs $25: each costs $0 or $250.
Report the spread too
Two choices with the same expected value can differ a lot in spread: in Academy's example, two screens both average $25 a repair, with standard deviations of $75 and $25.