How does expected value handle uncertainty in decision-making?

Expected value handles uncertainty in decision-making by utilizing a probabilistic approach. It enables decision-makers to quantify the potential outcomes of various choices based on their likelihood of occurrence. This method involves assessing all possible outcomes for a decision, along with the probabilities associated with each outcome. The expected value is then calculated by multiplying each outcome by its probability and summing these products.

This allows decision-makers to create a clearer picture of the potential risks and rewards associated with a particular action, facilitating more informed choices. By taking into account various scenarios, rather than focusing solely on worst-case outcomes or averaging past results, the expected value provides a comprehensive view that incorporates uncertainty into the analysis. Using this probabilistic framework helps in evaluating the best course of action when faced with uncertainty.