Expected Monetary Value (EMV)
Expected monetary value (EMV) is a quantitative risk analysis technique that calculates the average outcome of a risk event by multiplying the probability of occurrence by the monetary impact. EMV for threats is negative; for opportunities, it is positive.
Explanation
EMV analysis is used to quantify risk exposure in monetary terms. The formula is straightforward: EMV = Probability x Impact. For example, a threat with a 30% probability and a $100,000 cost impact has an EMV of -$30,000. An opportunity with a 20% probability and a $50,000 benefit has an EMV of +$10,000.
When applied to all identified risks, the sum of individual EMVs represents the overall expected risk exposure and is commonly used to determine the contingency reserve. For instance, if the total EMV of all threats is -$200,000, the project may establish a $200,000 contingency reserve.
EMV is also the foundation of decision tree analysis, where it is calculated for each branch to determine the optimal decision path. The technique is most appropriate when risk events are independent and their probability and impact can be reasonably estimated. It does not account for risk interactions or correlations—for that, Monte Carlo simulation is preferred.
Key Points
- •Formula: EMV = Probability x Impact (negative for threats, positive for opportunities)
- •Sum of all EMVs helps determine contingency reserve amounts
- •Foundation for decision tree analysis
- •Does not account for risk interactions; Monte Carlo is needed for correlated risks
Exam Tip
EMV calculations are common on PMP and CAPM exams. Practice computing EMV for individual risks and summing them. Remember: threats are negative, opportunities are positive.
Frequently Asked Questions
Related Topics
Decision Tree Analysis
Decision tree analysis is a diagramming and quantitative technique used to evaluate multiple decision alternatives, each with associated costs, probabilities, and outcomes, to select the option with the best expected monetary value.
Perform Quantitative Risk Analysis
Perform Quantitative Risk Analysis is the process of numerically analyzing the combined effect of identified individual risks and other sources of uncertainty on overall project objectives.
Monte Carlo Simulation
Monte Carlo simulation is a quantitative risk analysis technique that uses random sampling of probability distributions for cost and schedule estimates to model possible project outcomes and calculate the probability of achieving targets.
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