11 April, 2024

What is Expected Monetary Value? (EMV)

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


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:

  1. Identify the level of total risk associated with an activity or project
  2. Compare alternative scenarios or options
  3. Contribute to a business case
  4. Calculate a prudent financial contingency for the activity or project
  5. Evaluate how much cost or resource it would be reasonable to allocate to risk mitigation activities
  6. Assess which choice is best when faced with a number of options

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.

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Mike Clayton

About the Author...

Dr Mike Clayton is one of the most successful and in-demand project management trainers in the UK. He is author of 14 best-selling books, including four about project management. He is also a prolific blogger and contributor to ProjectManager.com and Project, the journal of the Association for Project Management. Between 1990 and 2002, Mike was a successful project manager, leading large project teams and delivering complex projects. In 2016, Mike launched OnlinePMCourses.
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