ACCA MA · Chapter 2 · Question 11 of 12
Which of the following is a limitation of using expected values for decision-making?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) The expected value may not be one of the possible outcomes and is less meaningful for a one-off decision
Explanation
An expected value is a long-run average, so it is most useful for decisions that are repeated many times. For a one-off decision the actual result will be one of the individual outcomes, which may differ greatly from the EV. EVs also ignore risk attitude. They can include losses and they do weight the size of each outcome by its probability.
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