Expected Value Traps in Interviews
Expected value traps interview prep for sign errors, missing costs, wrong probabilities, risk-neutral misuse, and stopping-rule mistakes.
Candidates reviewing expected value before trading or quant interviews.
Trap 1: wrong signs
Losses, fees, and entry costs need negative signs. A positive gross payoff can still have negative net expected value.
Trap 2: wrong probabilities
Expected value depends on the probability model. Update probabilities after conditioning or new information.
Trap 3: missing costs
If the prompt mentions fees, spreads, or penalties, include them before averaging payoffs.
Trap 4: risk-neutral overreach
A fair-value calculation may assume risk neutrality. A choice question may require utility, constraints, or downside discussion.
Trap 5: stopping errors
In stop-or-continue problems, compare the current value with the correct continuation value, not a generic average.
Common mistakes
Candidates often compute quickly but fail to state assumptions. EV answers are fragile when costs, conditions, or choices are implicit.
Practice the pattern
Use the LeetQuidity curriculum and calibration to turn this topic into a focused practice plan.