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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