GIGAMIND

Folder:
113 Math
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113.036.01 Expected Value - example using insurance purchase decision

Expected value using an insurance purchase decision

To find the expected value of a random variable like an "insurance" item:

  • Phone warranty cost = 300
  • Phone replacement cost = 800
  • Probability of breaking phone = 20%
Value Probability Value * Probability
Phone breaks 500 20% 100
Phone doesn't break -300 80% -240
-140

In this case there is an expected value of -$140 to buy the warranty. Whether that's "worthwhile" for the consumer is a different question.


Tags:
  • statistics
  • probabilities