What is EV or Expected Value

Let’s take a look at how EV or expected value can help us become better traders and understand how to measure risk in the market (or life in general). EV can be considered the equivalent of expectancy in the poker world so I think it’s a great read for everyone striving to gain an edge in their trading (or at least understand how an edge can be quantified).

Wikipedia Definition:

In probability theory the expected value (or mathematical expectation, or mean) of a discrete random variable is the sum of the probability of each possible outcome of the experiment multiplied by the outcome value (or payoff). Thus, it represents the average amount one “expects” as the outcome of the random trial when identical odds are repeated many times. Note that the value itself may not be expected in the general sense - the “expected value” itself may be unlikely or even impossible.

In simpler terms:

Expected Value (EV) is the amount of money you can expect to earn over time by making a calculated decision in a specific situation.

The expected value from the roll of an ordinary six-sided die is 3.5 (how do we get here):

Rolling each number has a probability of 1/6.

Multiplying the values with their respective probability gives us 3.5 or:

1 * 1/6 = 1/6

2 * 1/6 = 2/6

3 * 1/6 = 3/6

4 * 1/6 = 4/6

5 * 1/6 = 5/6

6 * 1/6 = 6/6

We get to 3.5 by adding them together:

1/6 + 2/6 + 3/6 + 4/6 + 5/6 + 6/6 = 3.5

What if the die was weighted and we know that the number “6″ has a 50% chance of coming up? We will assume that the other five numbers still have a uniform distribution (equal chance of coming up in regards to each other):

1 * 1/10 = 1/10

2 * 1/10 = 2/10

3 * 1/10 = 3/10

4 * 1/10 = 4/10

5 * 1/10 = 5/10

6 * 1/2 = 3

The expected value from the roll of this weighted die is 4.5.

We can now bet a weighed and non weighted die and know the outcome of our bets and determine the profitability, if any.

Now, let’s pretend we are flipping a coin with two betting scenarios:

Scenario #1:

We bet on the outcome, and receive even-money (we bet $1, we will win $1) on our bet. In this case, if we flip the coin 100 times, we can expect to win 50 times, and expect to lose 50 times. Overall, we win $50, and lose $50, breaking even. We have neither won nor lost any money (and over time, we will not expect to win or lose any money), so our EV is 0.

Scenario #2:

We bet on the outcome, and receive 2:1 odds (we bet $1, we will win $2) on our bet. In this case, if we flip the coin 100 times, we still expect to win 50 times, and expect to lose 50 times. But, the 50 times we win will earn us $100 (50 * $2), and the 50 times we lose we will still only lose $50. So, over 100 flips, our profit will be $50, or an average of $.50 ($50 / 100 flips). Our EV is the average win/loss per flip, or $.50. for every time this flip occurs so we can expect to make $.50.

Like expectancy in trading (a couple of trades will not give you the anticipated outcome of your system), you must understand that these EV outcomes will only take place over time, the long run. Both expectancy and expected value do not apply to short term results (we must make hundreds, if not thousands of trades, flips or rolls to expect the calculated outcome of the game.

I once read this from a poker article:

“ it’s not important to know the exact EV of a situation (in fact, with all the variables and unknown in poker, it’s generally impossible), but it is important to know whether a situation is +EV (i.e., you’ll make money long-term) or –EV (i.e., you’ll lose money long-term). It’s also generally helpful to know if a +EV situation is very +EV (i.e., you’ll make a lot of money long-term) or marginally +EV (i.e., you’ll make a little money long-term).”

I couldn’t have said this better when it comes to making trades for a positive expectancy system. We will never know ALL of the variables in the market so the most important part of a trade is to understand if the risk/reward is positive, very positive or negative.

You will be well on your way to consistent profits by understanding the risk and the potential reward of each and every trade you make. As in poker, dice or coins, a +EV or –EV can be determined even if every variable is not known. The name of the game is to play when you know it is a +EV situation or trade in our case.

Word of Mouth Doesn’t Work.

Hey, check out this shampoo.? Look at this new game.?? Try the ice-cream there.? How often do you get recommendations and actively seek them out?

Sure there is a chance that your word of mouth marketing efforts might bring you business and branding, but how many times do they work?

Seth Godin has a few thoughts on why sometimes there are problems in regards.

Sometimes, what you do is done as well as it can be done. It's a service that people truly love, or a product they can't live without. You're doing everything right, but it's not remarkable, at least not in the sense of “worth making a remark about.”

What's up with that?

He then goes on to list some reasons why some things spread virally work out better than others.

Some of the reasons are fairly obvious.? Perhaps it's not something that you would talk about naturally, or perhaps you're with the wrong group at the time.? Anyways, this is a quick little article and I would recommend it.

Thanks To Our Sponsor: Pod6r Media Network Blogging pods are about to take on a whole new name.

The Key To Finding Cheap Car Insurance

The costs of car insurance, as with all things car related, have gone up in recent months for any number of reasons. Car insurance companies give all sorts of reasons for that, and most of them are complete garbage. Although we’ve all been taught to take everything with a pinch of salt, it doesn’t help you when you have to fork out for it after buying a new car! However, if you are with Tesco insurance you can save a lot of money.?

Tesco insurance insurance really can helps its customers in a number of ways. The choice of car insurance products is fantastic so you get the deal you need at the price you want to suit you perfectly. In fact, Tesco insurance can be the answer to your prayers. Obtaining a quote takes but a few minutes and is a decision that you will never regret!

Guest Post - The Importance of Buying Local

*Guest Post*

I’m SFordinarygirl at Sf Money MusingsI’m a 26-year-old girl still making $30K a year after two years at a job I’m desperately trying to leave. Thanks to Mapgirl for allowing me to contribute a guest post while she’s enjoying her three-day vacation.

I want to emphasize the importance of eating and buying local food. Over the last year and a half after living on my own, learning to eat on a limited income ($30K) I’ve discovered a lot of things about food.

On my own I discovered a few things about food:

Most of the garlic, ginger and certain root vegetables sold in ethnic grocery stores and in Chinatown came all the way from China

Some of the produce is treated or coated with an exterior wax to maintain freshness

Imported produce flooded the grocery stores

It really surprised me to learn most of the garlic sold in Chinatown came from China. Gilroy, California is garlic capital – a mere 80 miles one-way from San Francisco. China’s even farther and who knows how they grow garlic. I was also disturbed me our grocery stores were stocking produce from a country with its own environmental and safety problems.

The problem with bringing fruit and vegetables far from our soils is freshness and quality. In order for produce from far away countries to be sold without spoiling they are often picked before their prime. This means garlic is plucked weeks before they are ready. It’s not just imported garlic that’s a problem. There’s also the problem of bringing blueberries from Chile. There’s no guarantee or assurance even organic produce shipped from far away is safe.

So I made a personal commitment to buy most of my groceries at the farmers market. At the market I have a direct relationship with the people who grow the vegetables and fruit I consume. There’s something exciting about eating a quart of big, red and plump strawberries. I had my first taste of fresh locally grown arugula and compared to the plastic packaged kind I used to buy at Trader Joe’s – there was no going back. The local grown arugula had a sharp bitter taste, typical of the fresh kind.

Our schedules are hectic and busy. It’s not always convenient or easy to buy local. We are often eating on the run, in the car or on our way to work. Dinner tends to be either a Lean Cuisine, a box of Mac and cheese or something prepared from Trader Joe’s. If each of us makes a commitment to buy one locally-produced vegetable and support our farmers, we would be help save the environment and see an improvement in our own diets and health.

I’ve noticed how much better my food tastes when it’s fresh and purchased directly from the farmers. Nothing beats a deep red heirloom tomato in the summer from the market.

For a listing of local farmers markets go to Local Harvest

2008 BAH rates available Wednesday

At long last, we have an apparent publication date! The 2008 Basic Allowance for Housing rates will finally be posted on Wednesday, December 12, according to the pentagon site. Don't know for certain at what time they will be posted, but check often, and when the site crashes, that's a pretty good sign they're available. :-)

Did you know that most military personnel, their spouses and their dependents will not be eligible for Refund Anticipation Loans this tax season? Details to follow tomorrow.

Construction Update

You know, everyone tells you must add an extra 10% on top of your estimate on any construction project to get the final cost.

Of course, my bathroom remodel is going poorly and it’s sucking up my 10% overage.

There was some concrete under the tile in the bathroom that’s coming down. Unfortunately, to get an even surface on the wall, the concrete has to be removed. Don’t ask me why in the 1950’s they put up concrete halfway up the walls, but they did. All the extra labor hopefully will not be a huge amount more, but I have a feeling it will cost me another 20% on top of the estimate.

I wanted to have a special countertop cut for me so I can have a shelf over the toilet, just like I had in the original bathroom. However, it has a 10-day lead time for the order, which would mean I’d be out of my apartment for over almost 2 months. The contractor thinks he can get me a light grey granite countertop cut in the same shape out of scrap material from his usual granite supplier. It will only cost me $100 more but will take 3 days instead of 10. Is that worth it to me? You bet. It’s been over a month since I’ve slept at home and I’m cranky.

But things got a lot worse. The contractor had a drywall guy come in and they put in the ceiling piece early in the week. They came back the next day and the tub was full of water and the new piece was soaked. Apparently, there’s another leak coming from the unit above mine. ARGH.

I don’t know how all this is going to play out, but why do I feel like it’s going to cost me more money and time, no matter what happens?

2008 Basic Allowance for Housing Rates Forthcoming

It's that time of year again! No, not the holiday season, but the month or so where military personnel and their families are anxiously tapping their toes waiting for the release of the next year's housing allowance figures. According to the Pentagon site, the 2008 BAH figures will be available in "mid-December." Historical data suggests this will probably be December 14 or December 17.
I suspect in many areas of the country, BAH rates will either level off or drop. There seems to have been a huge increase in BAH rates nationwide in 2005, and in many areas that appears to have been too much, such that rates have either flattened or fallen in the past two years. The trend will probably continue.
BAH rates are determined by an annual survey of properties in a given military housing area, and by determining the median housing costs (rent, utilities, and renters insurance) for servicemembers based on the type of housing they *should* have based on their paygrade and family size. Basically that means more modest housing for junior enlisted and more substantial housing for senior enlisted and officers, as well as more substantial housing for servicemembers with dependents. A single E3 has more modest housing needs than an E7 with a wife and three children.
What happens if you live in an area where the BAH rates will drop from 2007 to 2008? You will be covered by "rate protection." Rate protection means you will receive the higher of the BAH you are entitled to on January 1, 2008, or the BAH you were entitled to on December 31, 2007. In other words, if you see that your BAH is expected to drop $200 per month between 2007 and 2008, provided you don't lose BAH eligibility for some reason, you will keep seeing the 2007 rate. However, if you move into the area from another duty station, you will receive the new (and lower) BAH rate. If the BAH annual survey has done its job properly, though, you shouldn't be paying too much out of pocket for housing expenses.

Biggest Purchase of the Year!

I confess, I splurged. I bought a Dyson vacuum cleaner. I was totally reluctant at first; after all, at more than $400, it's my most expensive purchase of the year. But after my first apartment sweep (and five canisters of horrifying gunk pulled off my floor), I absolutely love it. It's worth every single penny. Vacuuming could very well be my new favorite sport. Which is weird for a girl who spends most of her time away from home...

The Cost (or, How I Paid for this Beast)
As you can probably guess, I didn't pay the whole $439 by my lonesome. B and I agreed to split the purchase, which was nice since he could probably live with another $40 vacuum that doesn't pick up anything (eh, guys). On top of his portion, I used a $50 gift card (cha-ching!). With that help, I was able to buy the Dyson outright (not on credit). PS. Love the feeling of ownership, rather than credit card debt!

At the Store
As for my purchase decision, I was between two vacuums - the Kenmore progressive, ranked #1 by Consumer Reports and priced at $375, and the Dyson Animal DC17, which received rave consumer reviews here (gracias), from my brother - an inventory manager at Best Buy - and on many Web sites, priced at $550.

I visited several retailers online, including Amazon, Best Buy and Sears to scope out pricing and reviews. I ended up at Sears, determined to buy the Kenmore model (though deep down I wanted the Dyson).

While browsing the aisle, B and I discovered the Kenmore needed new filters every ten months; we added up the cost of filters over five years and found they added an additional $210 to the price of the vacuum. That brought the total five-year cost of the Kenmore model to $585 (plus tax, of course). I was bummed, but at that point, the sales lady stepped in and told me she had a Dyson on close-out pricing... and so the magic began.

Sears had a Dyson model with attachments (the Sears-exclusive fully equipped DC-14) for $439 - it requires no additional filters or extra parts, and comes with a 5-year warranty. She demonstrated some nifty features, like the crazy long hose and ghost-busters extendo-arm, and then had me vacuum some dirt off the floor. I kid you not, at this point, I was in the center of my very own "as seen on TV" commercial. Sweet.

At that point I was sold, though still a little skeptical of how great a vacuum could really be. I mean, I already vacuum my floors every week. Would there really be that much of a difference? We packed up the cool-looking Dyson into the Eclipse and headed off into the sunset, with just a twinge of buyers' remorse.

The Proof is in the Pudding (THIS THING ROCKS!!!!)
OK, you're bored, I know. But I have to tell you, this vacuum is freakin' amazing. I pulled what looked like an entire additional cat off the floor. It was like I never had vacuumed before; like there was a science project happening in my living room. Poor B was trying to study and I just kept shoving the full canister in his face shouting, "Look! Look at this gunk! Can you believe it? Can you believe we're living in this???"

My carpets are clean, less smelly and less full of cat hair. If you are a pet owner, I would definitely recommend getting the Dyson, especially if you have frequent visitors with allergies (I do - my mom can't visit for more than a half-hour at a time; though I'm hoping she can get in a full hour now). Sure, there are probably more pressing things to spend your money on, but if you're living in an apartment, and your vacuum breaks and it's the only appliance you are actually responsible for and you have the money set aside (wow, that's a lot of "ifs"), then I would splurge.

I think it's safe to say I'm obsessed. (You should have seen me cleaning the thing after I used it; it was like my dad cleaning, waxing and polishing a car.) If you ever want to come over and watch me vacuum, you totally can. Maybe the next time I sweep, I'll take a picture of the full canister to share so you can share my obsession.

Until then, what new items are you randomly obsessed with? What's the best big purchase you've ever made? Ever had a bad case of buyers' remorse? Enlighten us!

How To Flub A Job Interview--Follow This Advice

Personal finance columns drive me up a wall. Here is a doozy of bad advice. We'll take it point by point.

Five Ways to Flub a Job Interview

by Penelope Trunk

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