Which statement best defines EMV in decision analysis?

• A. EMV is the average outcome across uncertain states weighted by their probabilities.
• B. EMV is the maximum possible payoff.
• C. EMV ignores probabilities.
• D. EMV is the same as the payback period.

Answer: (A)

The main idea being tested is how EMV (expected monetary value) combines outcomes and their likelihoods. EMV is the probability-weighted average of all possible monetary results for a decision. In practice, you multiply each possible payoff by its probability and sum these products across all states of the world. This gives a single number that reflects both how big the payoffs are and how likely each one is, so you can compare choices on a fair, long-run basis.

This aligns with the description of “the average outcome across uncertain states weighted by their probabilities.” The other interpretations miss or distort EMV: choosing the maximum possible payoff ignores how likely it is, EMV relies on probabilities rather than ignoring them, and the payback period measures time to recover investment, not the expected monetary value.