How Expected Value Can Guide Your Next Decision

Let’s get into one of my favorite topics—MATH! In this edition, we’ll dig into the concept of expected value and how you can use it as a systematic approach to decision-making. While I often frame things through a trading lens, expected value is a tool you can apply to everyday choices, big or small. It’s a simple concept at its core, but not one that many are in the habit of applying consistently. Let’s dive in.

Simply stated, EV is the sum of outcomes weighted by probability. For binary outcomes:

Using expected value can help normalize your decision-making, giving you an objective lens to evaluate whether a trade is worth taking as inputs (probabilities & risk/reward) change. It removes emotion from the equation and helps you stay consistent in how you analyze trades.

Here’s a simplified poker analogy: Imagine you're holding a flush draw after the flop in Texas Hold'em. There are 9 cards left in the deck that can complete your flush. There are two more cards to come, and you’re deciding whether to call a $20 bet into a $100 pot.

Best-case outcome: You hit your flush and win $100, a 35% chance to hit your flush with two cards to come.

Worst-case outcome: You miss and lose the $20 you called and is a 65% chance to miss

So even though you might lose this particular hand, on average, making this call will win you $22 every time you’re in a similar spot. That’s positive expected value, and it’s how winning poker players think—not about one hand, but about the long run.

When expected value is positive, that’s where your trading capital should go—and the higher the EV, the more capital you should consider allocating. Back to poker: you wouldn’t bet the same amount pre-flop with pocket Aces as you would with Queen-6 offsuit, right? The higher your win probability, the more it makes sense to press your edge.

The beauty is that this can be applied to decisions outside of trading, too. Here’s an everyday life example:

You’re heading to work. The weather forecast says there’s a 30% chance of rain.

If it rains and you don’t bring an umbrella, you’ll get soaked and maybe ruin your outfit—let’s say that’s a $50 inconvenience (wet clothes, discomfort, maybe dry cleaning).

If it doesn’t rain, and you carry the umbrella, it’s a minor hassle—say, $2 of inconvenience (extra weight, carrying it around for nothing).

You’re deciding: Should I bring the umbrella?

Let’s calculate the expected value of not bringing the umbrella:

Now the EV of bringing it:

Even though carrying the umbrella is slightly annoying, losing $1.40 in expected value is way better than losing $15. So, bringing the umbrella is the better decision based on expected value.

Just to drive home the point, here’s one more example:

You’re buying a new phone for $1,000. At checkout, the store offers a 2-year extended warranty for $150. You're deciding whether it’s worth it.

Let’s break it down:

• Based on past experience or research, you estimate there’s a 5% chance the phone will break outside the standard 1-year warranty and cost the full $1,000 to replace.

• There’s a 95% chance it won’t break or will break within the free coverage window.

Expected Value of not buying the warranty:

Expected Value of buying the warranty:

So:

• Not buying = - $50 expected value

• Buying = - $150 expected value

Declining the warranty has a better expected value, even though there’s a risk. Over time, you'd save money by self-insuring (i.e., paying out-of-pocket only if something actually breaks).

Key takeaway: Expected value helps you make smarter, objective decisions when outcomes are uncertain—not just in poker, but in everyday decisions like these.

Now, I’m not saying you need to whip out your phone and calculate EV for every decision (though you totally could). But if you start applying this framework to bigger decisions, you'll start to develop an instinct for which choices offer better expected value—even without crunching the numbers.

We’re constantly bombarded with information, and making decisions—whether in trading or in everyday life—can feel paralyzing because uncertainty is always part of the equation. Expected value won’t remove that uncertainty, but it will give you a way to be more decisive in an unpredictable world.

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Hitting the Bid content is for informational and entertainment purposes only. The information contained is not, nor is it intended to be, trading or investment advice or a recommendation of any security, futures contract, digital asset or alike. Trading and investing contains risk. All investors should evaluate their own risk tolerance, financial situation, and investment duration before entering any trade or investment.