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.
Graph:
- 113.036.01 Expected Value - example using insurance purchase decision to 113.036 Statistics - Expected Value
- 113.036 Statistics - Expected Value to 113.036.01 Expected Value - example using insurance purchase decision