Making Smarter Decisions by Quantifying Outcomes
In business, investing, and life, we are constantly faced with uncertainty. Should we launch a new product? Should we expand to a new market? Should we take a new role or project? These decisions carry various possible outcomes, each with its own potential upside or downside. Expected Value (EV) is the mental model that helps us navigate these choices by grounding them in rational, quantitative analysis.
What is Expected Value?
At its core, Expected Value is the weighted average of all possible outcomes, factoring in both their probabilities and payoffs. The formula is straightforward:
Expected Value (EV) = ∑ [Probability of Outcome × Value of Outcome]
This model enables leaders to shift from gut-based decision-making to probabilistic reasoning, allowing clearer comparisons between options with uncertain outcomes.
Why Expected Value Matters for Executives
High-stakes decision-making often involves complexity, risk, and incomplete information. EV thinking:
- Clarifies trade-offs between upside and downside.
- Reduces emotional bias, especially fear of loss or irrational optimism.
- Supports capital allocation by helping prioritize projects or investments with the highest return potential.
- Encourages long-termism, since strategies with positive expected value tend to outperform over time—even if they lose in the short run.
In effect, EV helps you become comfortable with uncertainty, and even embrace it, when the odds and rewards are in your favor.
Real-World Applications
1. Capital Allocation
Let’s say your company is considering three projects:
| Project | Probability of Success | Payoff if Successful | Cost | Expected Value |
|---|---|---|---|---|
| A | 30% | $5 million | $1 million | $0.5M |
| B | 70% | $1.5 million | $500k | $0.55M |
| C | 90% | $1 million | $800k | $100k |
Despite Project A being the least likely to succeed, its payoff gives it nearly as much expected value as Project B, and more than Project C. An EV approach makes these trade-offs visible and rational.
2. Venture Investing
Early-stage investors rely heavily on EV thinking. A portfolio of ten startups may have seven total failures, two minor wins, and one outsized success. It’s the expected value of that one win—often 50x+ return—that justifies the entire strategy.
3. Personal Career Decisions
Imagine you’re offered two job opportunities:
- Job X: 70% chance of solid growth, $200k total value; 30% chance of stagnation, $100k value → EV = $170k
- Job Y: 50% chance of breakthrough trajectory, $500k total value; 50% chance of burnout, $50k value → EV = $275k
While Job Y is riskier, it may offer significantly higher expected value—especially if you’re in a life stage that allows bold moves.
Expected Value ≠ Expected Outcome
It’s vital to remember: expected value does not predict what will happen, only what is rational on average across repeated decisions. A single decision may not align with the expected value, but consistently making high-EV choices leads to long-term success.
This mindset also fosters anti-fragility—you may lose some battles, but you win the war by consistently taking asymmetric bets with positive expected value.
How to Use Expected Value in Practice
- List all possible outcomes of a decision.
- Assign probabilities to each outcome. Be honest, not optimistic.
- Estimate the value (or cost) of each outcome.
- Do the math: Multiply the probability by the value for each, then sum.
When possible, convert qualitative outcomes into quantitative proxies—this makes the process clearer and more repeatable.
Common Pitfalls to Avoid
- Overconfidence in probability estimates: Always sanity-check assumptions.
- Ignoring downside risk: EV doesn’t capture variance or potential for ruin. Use it with models like Margin of Safety and Asymmetric Risk-Reward.
- Thinking short-term: EV plays out over repeated exposure. One-off decisions need added layers of judgment.
Final Thoughts
Expected Value thinking is a powerful tool in any executive’s mental model toolkit. It teaches discipline under uncertainty, rational prioritization, and confidence in probabilistic decision-making. The most successful operators and investors don’t make decisions based on what feels good—they make them based on what the math says will win over time.
“If you’re not thinking in terms of expected value, you’re not thinking.” — Charlie Munger
Missed out on the over all series?
Murray Slatter
Strategy, Growth, and Transformation Consultant: Book time to meet with me here!
