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Imagine that you have the opportunity to participate in a simple game in which you are asked to correctly call the toss of a fair coin. If your call is correct, you will win $20,000; if it is incorrect, you will win nothing.

Imagine that you have the opportunity to participate in a simple game in which you are asked to correctly call the toss of a fair coin. If your call is correct, you will win $20,000; if it is incorrect, you will win nothing.

If you were able to play such a game "for free," the expected value of each trial would be +$10,000. If you had to pay $10,000 each time you played, the EV would be zero, so that, statistically, you then would be "trading dollars." If you were willing to invest $8,000 in one trial of this game, the EV would be +$2,000 (Table 1). In this example, there are only two possible outcomes and you are betting on one trial. It is important to emphasize that in oil and gas exploration, there are many possible outcomes. Furthermore, the concept of expected value as a decision criterion requires repeated trials. The expected value is the average profit per decision assuming repeated trials are made.

 

If you were able to play such a game "for free," the expected value of each trial would be +$10,000. If you had to pay $10,000 each time you played, the EV would be zero, so that, statistically, you then would be "trading dollars." If you were willing to invest $8,000 in one trial of this game, the EV would be +$2,000 ([[Image:EVACSTb1.png|Table 1]]). In this example, there are only two possible outcomes and you are betting on one trial. It is important to emphasize that in oil and gas exploration, there are many possible outcomes. Furthermore, the concept of expected value as a decision criterion requires repeated trials. The expected value is the average profit per decision assuming repeated trials are made.

Faced with choosing among several options, the decision rule is to select the option having the highest EV. Remember, one alternative is to invest in a risk-free project having some minimum return (net present value = 0 discounted at a risk-free interest rate). Obviously, when operators choose to participate in ventures having negative expected values, they are "betting against the House."

Faced with choosing among several options, the decision rule is to select the option having the highest EV. Remember, one alternative is to invest in a risk-free project having some minimum return (net present value = 0 discounted at a risk-free interest rate). Obviously, when operators choose to participate in ventures having negative expected values, they are "betting against the House."