Resolved: Why would calculate the expected value as we clearly see that the probability of each outcome
At 4:42 we calculated the expected value and it's positive, but isn't that deceptive?
The expected value is affected by the large number of the profit (900) in the increase outcome even though the higher probabiliy goes to the decrease outcome. Isn't it similar to the way the mean of numerical variables can be easily affected by the outliers and and can be tricky?
Hey Sayed,
Thank you for reaching out.
The expected value represents the average outcome one would anticipate over a large number of trials. To put it in perspective, imagine we are conducting an experiment with many trials where there's a 60% chance of forfeiting $100 and a 40% chance of receiving $900. As the trials accumulate, the average balance would converge toward a $300 profit. This illustrates that, despite the lower probability of the larger gain, the expected value still suggests a profitable average in the long run.
Kind regards,
365 Hristina