Assumptions and method
Probabilities must sum to 100%. An average does not remove tail risk; this tool evaluates one chance node rather than an entire tree.
Test a scenario
Use the result in a decision
Describe events, consequences and assumptions before assigning numbers.
Probabilities must sum to 100%. An average does not remove tail risk; this tool evaluates one chance node rather than an entire tree.
Set a baseline and change one assumption to compare outcomes.
A worked example
Follow the fixed teaching example
- Convert 30% and 70% to 0.3 and 0.7; they sum to one.
- Expected payoff = 0.3 × (−12,000) + 0.7 × 4,000 = −800.
These illustrative inputs describe a project scenario, not a published benchmark. All monetary inputs use the same currency and price basis.
- One row per outcome: probability %, payoff
- 30, -12000 70, 4000
- Expected payoff
- -800
Interpret the output only within the assumptions above. Changing the inputs changes the result; it does not validate the inputs.
Source & credit
Standard estimating practice; the cited guide documents use rather than claiming invention.
GAO: Cost Estimating and Assessment Guide
This is independently written code and explanation of the underlying method. The linked publication, its diagrams and its trademarks remain its owner’s material; no permission to reuse them is implied.