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Hello Tutor. I hope you are doing well.
My question relates to the concept of Expected Value.In case there’s a question as to whether Expected Value concept incorporates element of risk and Uncertainty what shall I say?
Yes or No.
Because while going through the concept of E.V it says that one of the benefit a is
1) Expected Value incorporates risk and uncertainty as it works upon probabilities that are assigned to the each possible outcome
On the other hand when it comes to Disadvantage, it says.
1)It does not provide any information about the possibility of dispersion of the actual outcome from the expected value (i.e.risk)2) E.V do not takes into consideration the risk appetite of the decision maker.
So what would be the right answer
Have you not watched our free lectures on this because it is made clear that someone making decisions based on expected values is risk neutral – i.e it does not take account of the risk appetite of the decision maker.
Suppose choice A gives either 40 or 60 with probabilities of 0.5.
Choice B gives either 10 or 90, again with probabilities of 0.5.They both have the same expected value, but which one do you think has the most risk.
Do please watch the lectures because this is explained in the lectures.
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