Expected Value

Expected Value (or EV) is the amount any form of financial risk (a bet, a raise, a call in poker; an investment in business) will win or lose in the long run. For example, if you 're making bets on a coin flip with someone and you win $1 if it lands heads and lose $1 if it comes tails your EV is exactly Zero. But let's say someone is stupid enough to bet you $2 for your $1 on the same even money bet. In this case, your EV on this particular bet is 50 cents. That's because you will be winning one bet for every bet that you lose (coins are a 50/50 bet). You win $2 the first bet then lose $1 on the second bet. You win a theoretical 50 cents per bet overall. If you're the one betting $2 to someone's $1 in an even money bet, then you will have negative EV.

Your objective as a poker player and business person is to seek out positive EV bets and do your best to make only those bets and investments that have positive EV.

Take the Google Adwords program. This is the advertising feature of Google wherein they charge you a certain amount each time somebody clicks on your ad on their search engine results page. Let's say that you will make $20 each time someone buys the ebook that you have on sale on your site and Google charges your Adwords account 20 cents per click.

If you can convert only 1 out of 200 visitors your EV per click/bet on your Adwords ads would be negative 10 cents. That is, you lose 10 cents in the long run each time someone clicks on your paid Google ads. If, on the other hand, you can get 1 out of 50 of the site visitors that clicked through your Google ads to buy then your EV per click/bet would be very positive. That's because you paid much less per click than the value that each click bought for you.

Lesson: Keep EV in mind each time you spend money on a website, an ad, an application that you use in your online business. If it's positive EV, bet or raise. If it's negative EV, fold.