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Computing Expected Values [Decision Trees
Posted on August 20, 2013 @ 10:47:00 AM by Paul Meagher

So you have a simple decision tree leading from actions, to events, to outcomes. You have labelled the probability of your events, the costs and payoffs associated with actions and outcomes, and you are wondering how you can use all this information to pick a course of action. One answer is that you can compute the expected value associated with each outcome and make your decision based upon the course of action that yields the highest expected value (e.g., highest average profit).

Fortunately, I do not have to explain what an expected value is or how to compute it because there is an excellent tutorial available that explains it all. So, sit back, and learn from MBA Bullshit how to use a decision tree to compute expected values and how you can use expected values to help you decide on a course of action.

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