Mathematical Expectation
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USMP
Saint Martin de Porres
FACULTY OF ACCOUNTING,
ECONOMIC AND FINANCIAL
SCIENCES
PROFESSIONAL SCHOOL OF ACCOUNTING
AND FINANCE
MATHEMATICAL HOPE
COURSE: QUANTITATIVE MODELS
AND OPTIMIZATION
TEACHER: NOELIA NOEMI DELGADILLO
RODRIGUEZ
NAME: FLOR DE MARIA HANCCO
CHOQUEHUANCA
AREQUIPA -
PERU
2020
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MATHEMATICAL HOPE
1) DEFINITION
The mathematical expectation or expected value of the random variable X is denoted as
E(X) and is defined as the sum of the product between the probability of a random
event occurring and the value of said event.
In mathematical form it is expressed as follows:
μ=E(X) = ∑ xi. P(xi) = x1.P(x1) + x2.P(x2) + x3.P(x3) +…
Where xi is the value of the event and P( xi) its probability of occurrence. The summation
extends over all the values that X admits. And if these are finite, the indicated
summation converges to the value E(X), but if the summation does not converge, then
the variable simply lacks the expected value.
When dealing with a continuous variable x, the variable can have infinite values and
integrals replace summations:
x P(x)dx)
Here f(x) represents the probability density function.
In general, the mathematical expectation (which is a weighted average) is not equal to
the arithmetic mean or average, unless we are dealing with discrete distributions in
which each event is equally likely. Then, and only then:
μ= E (X) = (1/n) ∑ xi
✓ Where n is the number of possible values.
The concept is very useful in financial markets and insurance companies, where
certainties are often lacking but probabilities are present.
2) PROPERTIES OF MATHEMATICAL EXPECTATION
4- Sign: if X is positive, then E(X) is also positive.
5- Expected value of a constant: The expected value of a real constant k is the
constant.
E(k) = k
6- Linearity in the sum: the expectation of a random variable that is in turn the
sum of two variables X and Y is the sum of the expectancies.
E(X+Y) = E (X) + E (Y)
7- Multiplication by a constant: If the random variable is of the form kX, where k
is a constant (a real number), it falls outside the expected value.
E (kX) =k E(X)
8- Expected value of the product and independence between variables: If a
random variable is the product of the random variables X and Y, which are
independent, then the expected value of the product is the product of the
expected values.
E(XY) = E(X).E(Y)
9- Random variable of the form Y= aX + b: is found by applying the previous
properties.
E(aX+b) = aE(X) + E(b) = aE(X) + b
In general, if Y = g(X):
E(Y) = E[g(X)] = ∑ g(xi). P[g(xi)]
Order in expected value: if X ≤ Y, then:
E (X) ≤ E (Y)
Since there are expected values for each of them.
3) MATHEMATICAL HOPE IN BETTING
When the famous astronomer Christian Huygens (1629-1695) was not observing the
skies, he devoted himself to studying, among other disciplines, the probability of games
of chance. It was he who introduced the concept of mathematical expectation in his
1656 work entitled: Reasonings about games of chance.
Huygens found that bets could be classified in three ways, depending on the expected
value:
4- Games with advantage: E(X) > 0
4- Fair bets: E (X) = 0
4- Game at a disadvantage: E(X) < 0
The problem is that in a game of chance mathematical expectation is not always easy
to calculate. And when you can, the result is sometimes disappointing for those who
wonder whether or not they should bet.
Let's try a simple bet: heads or tails and the loser pays a $1 coffee. What is the
expected value of this bet?
Well, the probability of getting heads is ½, equal to getting tails. The random variable is
winning $1 or losing $1, the win is denoted with a + sign and the loss with a - sign.
We organize the information in a table:
x 1 -1
1 1
2 2
P(x)
We multiply the values of the columns: 1. ½ = ½ and (-1). ½ = -½ and finally the results
are added. The sum is 0 and it is a fair game, in which participants are expected to
neither win nor lose.
4) EXAMPLES
+ EXAMPLE 1
We'll start by rolling an honest die. What is the expected value of the launch? Well, if
the die is fair and has 6 sides, the probability of any value (X=1, 2, 3…6) coming up is
1/6, like this:
E(X) = 1. (1/6) + 2. (1/6) + 3. (1/6) + 4. (1/6) + 5.(1/6) + 6. (1/6) = 21/6 = 3.5
The expected value in this case is equal to the average, since each head has the same
probability of coming out. But E(X) is not a possible value, since no face is worth 3.5.
This is perfectly possible in some distributions, although in this case the result does not
help the bettor much.
+ EXAMPLE 2
Two fair coins are tossed into the air and we define the random variable X as the
number of heads obtained. The events that may occur are as follows:
• No heads come up: 0 heads which is equal to 2 tails.
• It comes out 1 head and 1 tail or cross.
• 2 faces come out.
Let C be a head and T a tail, the sample space describing these events is as follows:
Sm = {Stamp-Stamp; Stamp-Face; Face-Stamp; Face-Face}= {TT, TC, CT, CC}
The probabilities of the events happening are:
P(X=0)= P(T).P(T) = ½ . ½ = ¼
P(X=1) = P(TC) + P(CT) = P(T).P(C) + P(C).P(T) = ¼ +¼= ½
P(X=2) = P(C).P(C) = ½ . ½ = ¼
The table is built with the obtained values:
x 0 1 2
14 1 14
2
P(x)
According to the definition given at the beginning, the mathematical expectation is
calculated as: μ=E(X) = ∑ xi. P(xi) = x1.P(x1) + x2.P(x2) + x3.P(x3) +…
Replacing values:
E(X) = 0. ¼ + 1. ½ + 2. ¼ = ½ + ½ = 1
This result is interpreted as follows: if a person has enough time to do a large number of
experiments tossing the two coins, he or she is expected to get a head on each toss.
However, we know that releases with 2 stamps are perfectly possible.
+ EXAMPLE 3
When tossing two honest coins, the following bet is made: if 2 heads appear, you win
$3; if 1 head appears, you win $1, but if 2 tails appear, you must pay $5. Calculate the
expected profit from the bet.
Solution
The random variable X is the value that the money takes in the bet and the probabilities
were calculated in the previous example, therefore the betting table is:
x 3 1 -5
14 1 14
2
P(x)
E(X) = 3 . ¼ + 1. ½ + (-5) . ¼ = 0
Since the expected value is 0, this is a fair game, so here the bettor is expected to
neither win nor lose. However, bet amounts could be changed to turn the bet into an
advantage game or a disadvantage game.
