BUS 221 Lecture Notes - Lecture 8: Profit Maximization, Expected Utility Hypothesis
6 Feb 2016
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Each option has various pros and cons. For any lottery ticket, there are 2 possible outcomes: you win, you lose. So you don"t know its actual value. But the probability of winning tells you what to expect. In the face of uncertainty about now, ask: Most financial actions have more than one possible financial outcome. To calculate expected value is to decide what all the possible outcomes are. Take the value of each possible outcome, and multiply it by how likely that outcome is (in % or decimal). Assume: 80% chance you"ll earn return, 20% chance you"ll earn . Ev = 80% x plus 20% x 1,000. Investing ,000 in a new company: 70% chance you"ll lose all your money, 30% chance you"ll get all your money back, plus earn ,000 profit. So we have a clear method to decide how to maximize money in the long run. But not all decisions are about money.
