
Michael Mauboussin: Put Expected Value In Your Valuation Toolkit
In this article, Michael Mauboussin explores how investors can generate excess returns by focusing on the gap between price and value, emphasizing the practicalities and psychology of expected value in investment decisions. He explains that while price is observable, value is inherently probabilistic, requiring careful estimation of possible payoffs and their probabilities.
The paper covers the challenges of modeling uncertainty, the importance of considering both probabilities and payoffs, the psychological hurdles investors face (like loss aversion), and best practices for applying these concepts across asset classes.