Evidence-Based Management

Expected value = (P1)(outcome 1) + (P2)(outcome 2)

For example, imagine that it is claimed that solution A will lead to a productivity increase of 1.5 million dollars (outcome 1). Now let’s assume the probability that this claim is correct, given the available evidence, is 60 per cent (P1). This means there is a 40 per cent probability that this claim is incorrect (P2). Let’s also assume that if the claim is false, the productivity may decrease by 150,000 dollars. In that case the expected value is 900,000 (0.6 × 1,500,000) minus 60,000 (0.4 × 150,000) = 840,000 dollars. With this expected value you will most likely decide to implement solution A.

Now consider the following example. Imagine that it is claimed that solution B will lead to ...