11.3 Expected Value (Expectation) 679 When a company determines the price to charge for a life insurance policy, it takes many factors regarding the insured person into account. These factors may include the insured person’s age, sex, health, family medical history, and lifestyle factors such as whether the person uses tobacco or drinks alcohol. Using large amounts of data, insurance companies can assign probabilities to each of these factors. These probabilities measure how likely the insured person is to die before a certain age. Such calculations use expected value or expectation. Many businesses and governments use expected value when making important decisions. Expected Value (Expectation) SECTION 11.3 LEARNING GOALS Upon completion of this section, you will be able to: ■ Determine expected value. ■ Determine fair price. Why This Is Important Expectation is used throughout the financial services industry and especially the insurance industry to set rates for products and services. Expectation is used by manufacturers when determining the length of the warranty on their products. Expectation is also used by many businesses whenever difficult decisions must be made. Expectation provides a tool that can be used to analyze all possible outcomes of a decision. c) the probability that the ball lands on 0 or 00. 1 19 d) the odds in favor of the ball landing on 0 or 00. 1 : 18 Recreational Mathematics 59. Multiple Births Multiple births make up about 3.5% of births per year in the United States. The following artwork illustrates the number and type of multiple births in the U. S. in 2021. Multiple Births in the United States in 2021 Twins: 114,161 Triplets: 2785 Quadruplets: 133 Quintuplets & higher order births: 15 Source: CDC.gov Determine an estimate for the odds against a birth being a multiple birth in 2021. 96.5 : 3.5 or 193 : 7 Research Activities 60. State Lottery Choose a state lottery and do research and write a paper indicating a) the probability of winning the grand prize. b) the odds against winning the grand prize. c) Explain, using real objects such as pennies or table tennis balls, what these odds actually mean. 61. Casino Advantages There are many types of games of chance to choose from at casinos. The casino has the advantage in each game, but the advantages differ according to the game. Do research and write a paper indicating a) the games available at a typical casino. b) the games for which the casino has the smallest advantage of winning. c) the games for which the casino has the greatest advantage of winning. Shutterstock
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