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TOPIC: Expected monetary value explanation on E11.07 Deci

Expected monetary value explanation on E11.07 Deci 14 years 7 months ago #988

  • Francisco Jimenez Buendia
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I would like to ask about the calculation done for the expected monetary value on E11.07.
The explanation about expected monetary value in the video at 16:24 states that EMV for the outdoor tennis tournament is 315,000, which is the maximum of:
-Rain:84,000 (0,4*210,000)
-Sunshine:315,000 (0,6*525,000)

However, from the example on PMBOK (figure 11-15, page 299) I had expected that EMV=84,000+315,000

Can you explain why using the maximum of Rain and Sunshine instead of the addition?

Re:Expected monetary value explanation on E11.07 D 14 years 7 months ago #989

  • Cormac Donnelly
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I just watched the same episode and had a similar question!

My calculation (based on the example on page 299 of The PMBOK Guide is):
Indoor: £418,000 = (0.4*£385,000) + (0.6*£440,000)
Outdoor: £399,000 = (0.4*£210,000) + (0.6*£525,000)

Therefore Decision EMV = £418,000.

As per The PMBOK Guide, EMV calculates the average outcome, not just the best.

Cornelis, please clarify!


Re:Expected monetary value explanation on E11.07 D 14 years 6 months ago #1074

  • Cornelius Fichtner
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Francisco, Cormac,

It has taken me some time to respond to you because I needed to go back to my reference materials and do research on this.

The simple answer to your question is: We are all correct, but you are a bit more correct.

In the various books about the decision tree you can find both ways of doing it. Some recommend that you choose the best alternative on a decision node, others recommend factoring in the percentages. Same with adding up. So it all depends as to whom you want to follow.

(As an aside: In the literature the reasoning for what you do (with our without factoring in your probabilities) is explained with the risk attitudes. A risk neutral person, they say, only uses the values and doesn't care much about probabilities. But that's a story for another day...)

Because the decision tree may be such a foreign concept to many PMP students I decided to go with the one where less calculations were needed.

However, you are slightly more correct, because as you have correctly noticed, the PMBOK Guide uses the more complex form where you factor the probabilities into your result on the nodes.

There are a number of small corrections that we need to make to some of the lessons at this time, so we will include an alternative calculation with this example as well.

Thank you for pointing this out to me and helping to improve the PrepCast!
Until Next Time,
Cornelius Fichtner, PMP, CSM
President, OSP International LLC
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