A Short Guide to Expected Monetary Value (EMV)

By Fahad Usmani 73 Comments

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I am writing this blog post on expected monetary value (EMV) upon receiving a request
from a visitor of my blog named Mohammad Anjum.
This technique is an important part of risk management, and is usually used in
medium, large and complex projects. Expected monetary value is used in the
Perform Quantitative Risks Analysis process, and is one of the few techniques in
the PMBOK Guide which involves mathematical calculations. Because of this
many aspirants leave this topic and try to avoid the whole concept.
On the surface this technique may look complex, however, it is a very simple
technique, involving relatively light mathematical calculations. Once you
understand the concept, it will be like a piece of cake.

Moreover, this concept is also important from a PMP, and PMI-RMP, exam point
of view. In your PMP, and/or PMI-RMP test, you are going to see a few questions
from the expected monetary value analysis.

By avoiding this concept not only do you miss an important risk

managementconcept, you also leave many questions unattended in the exam.
To understand these concepts I suggest you read this blog post, follow the
examples, and ask questions if you have trouble!

Before we start discussing the expected monetary value concept, we will briefly
talk about probability and impact, because in the EMV calculation we are going to
use them. If you understand probability, you should not have any difficulty in
understanding the expected monetary value properly.

Probability
Probability is the measurement of the likelihood of the occurrence of any event.

For example, if you toss a coin, it will either show heads or the tails. There is a
50% chance of showing heads, and a 50% chance of showing tails. So in this
case you will say that the probability of showing heads (or tails) is 50% (or 1/2).

Lets discuss it mathematically.

The formula to calculate the probability is:

Probability of an event happening = (Number of favorable events that can

occur)/(Total number of events)

Now lets see how the above formula fits into tossing the coin.

Total number of events = 2 (because the coin can either show heads or the tails)

Total number of favorable events = 1

Therefore, the probability of showing heads = (Number of favorable
events)/(Total number of events)

= 50%

So if you toss the coin the probability of showing heads is 50%.

Got it?

If not, let me give you another example.

Suppose you are throwing a die, what is the probability of the number 5 coming
up?

If you throw the die it will show you one of the following: 1, 2, 3, 4, 5, or 6.

Therefore, the total number of events = 6

Now you want die to show the number 5.

Total number of favorable events = 1

Therefore the probability of showing the number 5 = (Number of favorable

events)/(Total number of events)

= 1/6

= 16.67%

So, if you throw the die, the probability of the number 5 showing is 16.67%.

Now let us find the probability of getting either number 5 or number 3.

In this case, the total number of favorable events = 2

Therefore, the probability of showing either number 5 or number 3 = (Number of

favorable events)/(Total number of events)
= 2/6

=1/3

= 33.33%

So, if you throw the die, the probability of getting either 5 or 3 is 33.33%.

This was a short introduction of probability. Now we come to the impact.

Impact
The impact is the amount that you will have to spend if any identified risk occurs.

For example, you have identified that during the peak of your project, some
equipment may break down and you may need to buy new equipment that will
cost you 2,000 USD.

So the impact of the risk will be 2,000 USD.

This was a short description of impact.

I hope that probability and impact are clear to you. If they are, we can move on to
our topic, i.e. expected monetary value (EMV).

Expected Monetary Value (EMV)

Expected monetary value (EMV) is a statistical technique in risk management
that is used to quantify the risks, which in turn assists the project manager to
calculate the contingency reserve.

According to the PMBOK Guide 5th edition:

Expected monetary value analysis is a statistical concept that calculates the

average outcomes when the future includes the scenarios that may or may not
happen.

Therefore, you can say that:

1. It helps in calculating the amount required to manage all identified risks.

 2. It helps in selecting the choice which involves less money to manage the
risks.
To calculate the expected monetary value of an event you must have the
probability and the impact should it occur.

Once you calculate this data, you will multiply the probability by the impact, and
the result will be the expected monetary value.

Expected Monetary Value (EMV) = Probability * Impact

If you have multiple risks, you will calculate the EMV of those risks separately
and add them all.

Please note that you will calculate the EMV of all risks, regardless of whether
they are positive risks or negative risks.

If they are negative risks the EMV will be negative, and if they are positive risks
the EMV will be positive. (This will become clearer when I will show you the
examples for calculating the EMV.)

Once you calculate the expected monetary value of the project, you will add this
amount to your work package costs estimate and generate the project baseline.

The amount you added to the work package costs estimate is known as the
contingency reserve.

For example, lets say you have four risks with probabilities and impacts as
follows:

Save
From the above table you can that you may need 4,500 USD to manage all risks,
but this would not be correct. Not all risks are going to happen, some of them
may happen and some of them may not. The risks that will not occur will add
their EMV to the pool and the risks that will occur will utilize the money from the
pool.

So, in the above case you may need to add 1,100 USD to your budget to cover
all identified risks.

The expected monetary value concepts works well to calculate the contingency
reserve when you expect a lot of risks, because the more risks you identify, the
spread of the contingency reserve will be better among all risks.

If you have identified fewer risks, you will not get enough spread and your
reserve may dry up too soon, or may not be large enough to cover a single large
risk.

Positive risks also play an important role in calculating the contingency reserve.
You should identify and include the positive risks in expected value calculations.

Expected monetary value also helps you with selecting the best decision.

For example, you have a risk and you have identified two risk response
strategies to manage this risk. So how will you select the best strategy?

You will use the expected monetary value to select the best risk response
strategy to manage the risk.

How?

You will calculate the expected monetary value for each response and select the
one which has the lowest value.

Now it is time to see some examples on expected monetary value analysis.

Example-I
You have identified a risk with a 30% chance of occurring. However, if this risk
occurs it may cost you 500 USD. Calculate the expected monetary value (EMV)
for this risk event.

Given in the question:

Probability of risk = 30%

Impact of risk = 500 USD

We know that:

Expected monetary value (EMV) = probability * impact

= 0.3 * -500

= -150

The expected monetary value (EMV) of the risk event is -150 USD.

Example-II
You have identified an opportunity with a 40% chance of happening. However, if
this positive risk occurs it may help you gain 2,000 USD. Calculate the expected
monetary value (EMV) for this risk event.

Given in the question:

Probability of risk = 40%

Impact of risk = 2,000 USD

We know that:

Expected monetary value (EMV) = probability * impact

= 0.4 * 2,000

= 800

Hence, the expected monetary value (EMV) of the risk event is 800 USD.

Example-III
In your project you have identified two risks with a 20% and 15 % chance of
occurring. If both of these risks occur they will cost you 1,000 USD and 2,000
USD respectively. What is the expected monetary value of these risk events?

In the above question, you have two negative risks; therefore, the expected
monetary value of these two risks will be the sum of the expected monetary value
of these risks individually.

Expected monetary value of two risk events = EMV of the first event + EMV of
the second event

EMV of the first event = 0.20 * (-1,000)

= -200

EMV of the second event = 0.15 * (-2,000)

= -300

Therefore, the EMV of these two risks events = (-200) + (-300)

= -500

The expected monetary value (EMV) of these two events is -500 USD.

Example-IV
During risk management planning your team has identified three risks with
probabilities of 10%, 50%, and 35%. If the first two risks occur, they will cost you
5,000 USD and 8,000 USD; however, if the third risk occurs it will give you
benefit of 10,000 USD.

Determine the expected monetary value of these risk events.

Expected monetary value of three events = EMV of the first event + EMV of the
second event + EMV of the third event

EMV of the first event = 0.10 * (-5,000)

= -500
EMV of the second event = 0.50 * (-8,000)

= -4,000

EMV of the third event = 0.35 * 10,000

= 3,500

EMV of all three events = EMV of the first event + EMV of the second event +
EMV of the third event

= 500 4,000 + 3,500

= -1,000

The expected monetary value (EMV) of all three events is -1,000 USD.

These are four relatively simple types of examples on expected monetary value
analysis chosen to show you the EMV calculation in different scenarios. In the
real PMP exam you will see the question based on these four basic types.

I believe if you understand the above examples, you should not face any
problems in solving the questions based on the expected monetary value.

Benefits of Expected Monetary Value (EMV) Analysis

The expected monetary value offers many benefits in risk management planning.
A few of them are as follows:

It gives you average outcome of all identified uncertain events.

It helps you select the best decision with a backup of objective data.
It helps you calculate the contingency reserve.
It helps you with a make or buy decision during the procurement planning
process.
It helps in decision tree analysis. Decision tree analysis is a graphical
diagrammatic technique which helps you understand the problem and
solution easily.
This technique does not require any costly resources, only the experts
opinion.
Drawbacks of Expected Monetary Value (EMV) Analysis
The following are a few drawbacks of expected monetary analysis:

This technique is usually not used in small and small-medium sized projects.
This technique involves expert opinions to finalize the probability and impact
of the risk. Therefore, personal bias may affect the result.
This technique works well when you have a large number of risks because it
helps spread the impact of the risks.
Sometimes you may miss the inclusion of positive risks, which may affect the
final outcome.
While doing the expected monetary value your risk attitude should be neutral,
otherwise it may affect the calculation.
The reliability of this analysis is based on the data provided as input to this
technique. Therefore the data quality assessment should be thoroughly
performed.
Summary
If you have a large project and you want to complete it successfully within your
budget and schedule, there is no escape from the expected monetary value
analysis. You should perform this risk management technique as it helps you
develop the decision tree and the contingency reserve. This helps increase the
confidence level in achieving the project objectives.

Here is where this blog post on expected monetary value (EMV) ends. If you
have something to say, you can do so through the comments section.