Part 2. MM4XL Tools > 1. Strategic Tools > Decision Tree > 4. Anatomy of a Decision Tree Output Report > Technicalities > Utility Functions > Expected Monetary Value (EMV)

Decision Tree

Expected Monetary Value (EMV)

Expected monetary value is interpreted as a long-term weighted average of branch values times the corresponding probability. This kind of utilitarian reasoning applies best to decisions that the company is frequently faced with, and it works best with important decisions that require only a minor part of the companys resources.

When the investment is substantial, investors may become less inclined to be risk takers. In this case the EMV can be computed in a way that takes the attitude of the investor into account. To do so, in the Tree Settings form set a Risk attitude index (R) larger than zero and lower than the maximum value at risk in the model. The final decision will be more conservative or greedy; according to the level of R you set.

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