How EV equals fair sale value.

Imagine you had a sweepstakes ticket in your hand and you didn't know if it was a winner or a loser. How much would you sell it for?

To answer that question, you use the formula for expected value (EV), which tells you the fair sale value of a sweepstakes ticket:

EV = (chance that the ticket will be a winner) x (the jackpot you will win) = Fair Sale Value.

Example:

Assume a ticket has a 1/100 chance of being a winner and the jackpot is $100,

Then the ticket's EV or fair sale value = (1/100) x ($100) = $1.

Why does EV = Fair Sale Value?

To understand the basic idea, imagine the following:

You have 100 unopened sweepstakes tickets in a bowl in your kitchen.
A winning ticket is worth $100.
Each ticket has a 1 in 100 chance of being a winner.
Only one ticket is a winner.
- So, you have 100 tickets and one is a winner worth $100.
- So, all 100 tickets together are worth $100, you could sell them altogether for $100.
  - Hence, we say that on average each ticket has an EV of $1, or a fair sale value of $1.

In other words, if you took one unopened ticket out of the bowl, you should be able to sell it for $1.

For Buyers an EV Dollar Has the Same Value as a Normal Dollar and It's Easier

Some people don't like EV dollars because they are a kind of legal lottery ticket. They'd rather have the definite cash instead of a chance to win a jackpot.

But, as the explanation above shows, an EV dollar does have the same economic value - fair sale value - as a normal dollar.

Some would say that it a virtual EV dollar has a greater value because it is easier to handle.

Handling costs are critical to making payment practical. Would you rather be given 10,000 pennies or a $10 bill?

That's the point of EV dollars: they make it possible to deal with the requirements of payment.

For Advertisers an EV Dollar Is the Same, on Average, as a Normal Dollar

Although EV dollars do not work the same way as normal dollars, they are basically the same for advertisers.

You can pay 1 normal dollar to 100 different callers or you can give each caller a 1 in 100 chance to win $100.

You pay out the same amount of money either way.

This is not exactly correct, though. With the real buyer condition on payment, you will end up paying a little more or a little less, on average, to real buyers.

For each EV dollar payment, you will be paying 1 normal dollar, on average.

However, because the system is probabilistic we cannot say whether, per EV dollar, you end up paying more than $1 on average to real buyers or less than $1, on average.