3 ms·

Sorry, but why are you adding the probabilities? They are not mutually exclusive. If there is a 1% chance that the company hits $7M, it's value is $70k -- that

• RiderOfGiraffes 16y ago
  That's only true if the other 99% of the time the company goes to the wall. Take 100 companies and look at where they are in two years. 50 have gone to the wall, 40 end up worth $100k, and 10 end up worth $1m. The 100, in total, they are worth 40*100k + 10*1,000k = 4,000k + 10,000k = 14,000k The average value of the companies at the start is then 140k. Now choose one of the companies. You don't know which it's going to be, but the expected value of the company you've chosen is 140k. The calculation I gave is the expected value, just as the "expectation" is computed in elementary probability. In the long run, you'll make 140k per company. To compute the expected value, you find all the possibilities, compute the probability and value, multiply them, and add up the answer over all cases. expected_value = 0 for case in possible_cases: prob = case.probability value = case.value expected_value += prob*value or sum( [ case.probability * case.value for case in possible_outcome ] ) ======== ADDED IN EDIT: If you seriously don't understand, and this doesn't help you, email me and we can work out where our understandings diverge, and pin down the calculation.