In this video, I answer the question, what is Expected Monetary Value, EMV? And we look at its use in risk management and decision theory.
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Expected Monetary Value in Risk Management
What is a Risk?
A risk is an uncertainty that can have an impact.
And we can put a measure on each of uncertainty and impact.
So, uncertainty is measured by probability – or likelihood. We measure it on a scale from zero (can’t happen) to one (will happen). Anything in between is uncertain.
There are many ways to measure impact, like the delay the risk could cause, or the reputational damage, or the number of people affected. The most common of all – because we are humans – is in monetary terms. That is, we can measure impact based on the cost implications. How much would it cost to put things right?
Basic EMV
The expected value of a risk could be stated simply as:
EV = Likelihood x Impact
And, the expected monetary value is what we get when we measure impact in financial terms:
EMV = Likelihood x Cost Impact
Complex EMV
However, in the real world, we rarely have just one possible impact. We have a number of potential outcomes – each of which has a different impact and a different likelihood.
Let’s call the cost impacts: C1, C2, C3 …
And we can call the likelihoods (or Probabilities): P1, P2, P3 …
The total Estimated Monetary Value is the sum of the EMVs of each pairing:
EMV = P1 x C1 + P2 x C2 + P3 x C3 …
or
EMV = ∑[Pi x Ci]
Expected Monetary Value for Decision Analysis
We can also assume that a number of outcomes can spring from a single event. The total probability of all outcomes will, necessarily, add up to 1.
We can draw a cause-and-effect tree and calculate the EMV for each outcome.
But we can also make that event a decision. Here, the EMVs represent the expected monetary value of each decision option.
Summary of Expected Monetary Value
So, to summarize, EMV is a quantitative risk analysis tool. We use it to:
However, as with all quantitative risk methods, the result you get is only as good as the estimates and assumptions you put into the model.
Recommended Videos to Help with Risk Management and EMV
Carefully curated video recommendations for you:
- Risk Management 101: An Introduction to Project Risk Management
- Risk Identification: How to Identify Project Risks | Video
- How to Create a Risk Management Plan | Video
- 4 Types of Project Risk – Different Forms of Uncertainty | Video
- What to Put in Your Risk Register (Risk Log) | Video
- 5 Ways to Remove a Risk Entirely | Video
- Project Risk Management – How to Manage Project Risk | Video
- What is a Residual Risk & What is Secondary Risk? | Video
- How to Do Risk Management in Agile Projects | Video
- PMI-RMP: PMI’s Risk Management Professional Certification – with Harry Hall
Recommended Articles to Help with Risk Management and EMV
- Ultimate Guide to Project Risk Management
- 10 Step Risk Management Kick-off for Your Project
- Spotting Project Threats: How to Find the Sources of Project Risk
- The Project Manager’s Guide to Simple Risk Analysis
- Every Project Management Risk Response Strategy: Are there 6, 7 or more?
- PMI-RMP: All you Need to Know about PMI’s Risk Management Certification
What Kit does a Project Manager Need?
I asked Project Managers in a couple of forums what material things you need to have, to do your job as a Project Manager. They responded magnificently. I compiled their answers into a Kit list. I added my own.
Check out the Kit a Project Manager needs
Note that the links are affiliated.
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