What is Expected Monetary Value?
While it is difficult to precisely quantify all loss events, even after they occur (e.g. the event’s impact on your brand), many risks can be reasonably quantified. One approach is known as Expected Monetary Value (EMV) or Expected Loss (EL).
This involves calculating a range of potential likelihoods and consequences.
Imagine if someone challenges you to you“toss this coin and I will give you $10,000 if it comes up heads and $20,000 if it comes up tails”. It’s a 50/50 bet so 0.5 probability for each outcome and your EMV for this wonderful arrangement would be $15,000.
The calculation is:
(50% * $10,000) + (50% * $20,000)= $5,000 + $10,000= $15,000.
You might assess that your supermarket has an 80% likelihood of losing $200,000 from shoplifters this year and a 20% chance of keeping that loss down to $100,000
(0.80 * $200,000) + (0.20 * $100,000) = $160,000 +$20,000 = Expected Loss (EL) of $180,000
Therefore any security measures which are 100% effective (hypothetically) and cost less than $180,000 per year are likely to be worthwhile.
If CCTV will reduce your expected losses by 50% (to $90,000) but will cost $60,000 per year, it has an EMV benefit of $40,000per year.
Existing situation = $180,000 EL
Upgrade = $60,000 p.a. for CCTV costs+ $90,000 p.a. in losses due to shoplifting = $150,000 per year; $30,000 lower than current situation.
An EMV of $30,000 improvement compared to no CCTV.