Compare Strategies Using Expected Value
Statistics and Probability · Flashcards · Recall
STATISTICS AND PROBABILITY · FLASHCARDS
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QUESTION
What is the expected cost formula for a policy with premium
P
P
P
and random out-of-pocket cost
X
X
X
?
QUESTION
Which option minimizes expected cost: choose the plan with larger or smaller expected total cost?
QUESTION
What is the expected value formula for outcomes
x
i
x_i
x
i
with probabilities
p
i
p_i
p
i
?
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ANSWER
E
(
X
)
=
∑
p
i
x
i
E(X)=\sum p_i x_i
E
(
X
)
=
∑
p
i
x
i
. Multiply each outcome by its probability and sum.
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