Who here has brains enough to understand expected value?

[tailfins]

If a $1,000 revenue investment has a 10% chance of success, it would have an expected value of $100. That means if you repeat the investment enough times, anything less than $100 spent on the investment is a profit, and you should never pay more than $100 for that investment.

Now what if the gross revenue is taxed at 40%? That lowers the expected value to $60. What if the tax is raised to 50%? That tax increase means that projects that cost more than $50, but less than $60 will be foregone because of the tax increase. Economic projects can be anything from a building or a laundromat or almost anything. They cause hiring because they need labor. They also build other businesses because materials are needed. The old rate and the new rate are immaterial, increased taxes cause some projects to be foregone because they wipe out the positive expected value of some projects.

[Tyr-Ziu Saxnot]

If a $1,000 revenue investment has a 10% chance of success, it would have an expected value of $100. That means if you repeat the investment enough times, anything less than $100 spent on the investment is a profit, and you should never pay more than $100 for that investment.

Now what if the gross revenue is taxed at 40%? That lowers the expected value to $60. What if the tax is raised to 50%? That tax increase means that projects that cost more than $50, but less than $60 will be foregone because of the tax increase. Economic projects can be anything from a building or a laundromat or almost anything. They cause hiring because they need labor. They also build other businesses because materials are needed. The old rate and the new rate are immaterial, increased taxes cause some projects to be foregone because they wipe out the positive expected value of some projects.

History has repeatedly shown, tax a man enough and you'll eventually get a strong reaction! Do not think that isnt part of their plan. They just expect to win after the altercation! And never think that they do not want it(the reaction), are not prepared and ever bother to think that they will not win..-Tyr

[gabosaurus]

It is actually a lot more complicated than that. Expected value is normally determined based on discrete variations of formulas.

You start with a random experiment with probability measure P on an underlying sample space. Suppose that X is a random variable for the experiment, taking values in S⊆R. Recall that E(X), the expected value (or mean) of X gives the center of the distribution of X. The variance of X is a measure of the spread of the distribution about the mean and is defined by var(X)=E([X−E(X)]2).

It gets a lot better, but you probably don't want to go into that. :cool:

[tailfins]

It is actually a lot more complicated than that. Expected value is normally determined based on discrete variations of formulas.

You start with a random experiment with probability measure P on an underlying sample space. Suppose that X is a random variable for the experiment, taking values in S⊆R. Recall that E(X), the expected value (or mean) of X gives the center of the distribution of X. The variance of X is a measure of the spread of the distribution about the mean and is defined by var(X)=E([X−E(X)]2).

It gets a lot better, but you probably don't want to go into that. :cool:

I'm game, but do your changes in distributions affect the underlying premise that a tax increase causes some economic projects to lose their expected payoff?

[gabosaurus]

I'm game, but do your changes in distributions affect the underlying premise that a tax increase causes some economic projects to lose their expected payoff?

Not especially. Tax increases are often factored in to the cost of projects, just as other expenses are. This increases the cost of the project, but it normally results in raising the finished value.
The profit level of any project is not shared by those who worked on the project. It only benefits the owners and shareholders.

[tailfins]

Not especially. Tax increases are often factored in to the cost of projects, just as other expenses are. This increases the cost of the project, but it normally results in raising the finished value.
The profit level of any project is not shared by those who worked on the project. It only benefits the owners and shareholders.

If the optimal price of the goods/services rendered were determined by studying the elasticity of demand, wouldn't moving to a different price to accommodate the tax increase put the price at a point that doesn't maximize revenue?

[logroller]

If a $1,000 revenue investment has a 10% chance of success, it would have an expected value of $100. That means if you repeat the investment enough times, anything less than $100 spent on the investment is a profit, and you should never pay more than $100 for that investment.

Now what if the gross revenue is taxed at 40%? That lowers the expected value to $60. What if the tax is raised to 50%? That tax increase means that projects that cost more than $50, but less than $60 will be foregone because of the tax increase. Economic projects can be anything from a building or a laundromat or almost anything. They cause hiring because they need labor. They also build other businesses because materials are needed. The old rate and the new rate are immaterial, increased taxes cause some projects to be foregone because they wipe out the positive expected value of some projects.
I've got brains enough to ask what data was used to output the 10% value. Like, what's the standard deviation? And why is the tax rate immaterial; if the tax rate doesn't matter to one investment-- how would it affect one investment over another?
Not to make mention of the real-world differences in cash vs accrual accounting, profit and loss over multiple years, alternative investment opportunities etc-- but all things held equal, A fixed tax rate of anything less than 1 (100% tax rate) would still have the same expected value curve. Meaning, rather you're taxed at 40% or 50%, you would still invest (hence your assessment on the I immateriality of tax rate). The reality, however, is losses and profits can be applied over multiple years (if corporate, individual is one year). Ladder investments are an integral part of an investment strategy. Myself, if you gave me a 10% ROI with a low variance, I'd be happy. Of course, there's always the potential for a loss too. That's why the std distribution would need to be considered.

[jimnyc]

I'm chiming in just to answer the question which is the title of the thread. Nope, not me. I have no idea about this crap and you guys discussing it looks like another language. Carry on! :beer:

[aboutime]

My primary question, or response to this thread would be. Who really cares?

It's not as if all of us woke up this morning, and before brushing our teeth. That question of 'Expected Value' just popped into our heads, and would control our thinking for the rest of the day.

Hypothetical at best. What is the use of asking such a question on a Monday morning?

[aboutime]

I'm chiming in just to answer the question which is the title of the thread. Nope, not me. I have no idea about this crap and you guys discussing it looks like another language. Carry on! :beer:


jimnyc. I'm with you. How hard can it be to wake up and ask yourself...."What does 'expected value' have to do with ANYTHING in my life today?"

[logroller]

I'm game, but do your changes in distributions affect the underlying premise that a tax increase causes some economic projects to lose their expected payoff?
How would the tax rate affect some and not all?

[logroller]

jimnyc. I'm with you. How hard can it be to wake up and ask yourself...."What does 'expected value' have to do with ANYTHING in my life today?"
Clearly, your response indicates that expected value is not something you consider.

[aboutime]

Clearly, your response indicates that expected value is not something you consider.


logroller. No! Clearly. You think I am as much of an Idiot as you are. But I will surrender to you. YOU WON! You can remain the lead Idiot as long as you want.

[fj1200]

The old rate and the new rate are immaterial, increased taxes cause some projects to be foregone because they wipe out the positive expected value of some projects.

I would think you'd be better off looking at it from the NPV side of things. Although there hasn't been any talk of a higher corporate rate which is what will typically affect big projects. I think it might be the expected return on the investor side of things that would have more effect based on the the cap gain rate being raised and dividends no longer being qualified.


How would the tax rate affect some and not all?

Some projects would be taken off the drawing board because higher taxes would result in a negative NPV. I would think the new medical devices (?) tax would be a good example as it is a tax on revenues and not profits. It may not affect current products or those in the pipeline but would affect products being considered.

[tailfins]

My primary question, or response to this thread would be. Who really cares?

It's not as if all of us woke up this morning, and before brushing our teeth. That question of 'Expected Value' just popped into our heads, and would control our thinking for the rest of the day.

Hypothetical at best. What is the use of asking such a question on a Monday morning?

I'm making a point that when you increase taxes, some economic projects are inferior to just holding on to the cash. When that happens, fewer people get employed. I was hoping to see how some people justify economic projects being foregone to justify a tax increase.