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Conditional probability
Conditional probability－Expected value, decision trees and combined probabilities
Expected value refers to summing up all different possible outcomes by weighting the possible outcomes by probabilities.
When the decisions become more complex, it requires the use of decision tree. Decision tree is a diagrammatic representation of a problem, where the decision makers need to consider the logical sequence of events. One event may depend upon another event, which means event one has a certain probability of occurring and event two, which depends on event one occurring, has another probability of occurring. In such situation, the combined probabilities should be calculated.
Attitude towards risk
The expected value approach assumes risk neutrality, but not all management decision makers are risk neutral. Sometimes, it should be aware that the expected values can lead to a false sense of security.
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