Score
0.30
Kelly
0.0%
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Independent coffee shop
Small business / franchise · 24-month horizon
Score 0.30 · expected value is negative under current assumptions (NO_GO)
With the resources you committed ($361,000 of equivalent capital) over a 24-month horizon, the prior win rate is 25.2%, the payoff ratio is b=1.18, giving an expected value of EV=-$163,045 and a risk-adjusted return of RAROC=-0.32. Under your current assumptions this is not worth acting on. The Kelly-optimal stake of 0.0% sits inside the 20% risk budget for your Working professional profile.
Equipment, build-out and working capital, plus two years of owner-operation. No government or industry body publishes a startup cost for this, and the Specialty Coffee Association has written that the circulating figures were made up — the number here is a vendor-blog midpoint and should be treated as the softest input in the catalogue.
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The three numbers
Win rate, payoff ratio and expected value decide most of the recommendation; Kelly, RAROC and score turn them into an action.
Win rate p
25.2%
Prior probability of success
Payoff ratio b
1.18 ×
b = E[win] / E[loss]
Expected value
-$163,045
EV = capital × (p × b − (1 − p))
Kelly
0.0%
(b·p − (1 − p)) / b
RAROC
-0.32
EV / (capital × σ)
Score
0.30
score = p × b
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What you are committing
Equivalent capital $361,000, converted from five kinds of resource.
This opportunity carries $361,000 of equivalent capital. The largest single component is cash, at 53% of the total ($190,000). Cash has a clear floor, but keep 30% in reserve. Never put every liquid resource behind one decision.
How non-cash resources are priced
One hour of your own time is priced at $38 and one person-month of hired labour at $8,080. These are market shadow prices, not what you personally earn; changing them changes only the scale, not the ranking.
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How this compares with the category
Your assumptions against the Beta(α, β) prior for this kind of decision.
Category mean win rate
26.7%
Beta(α=8, β=22)
Category payoff P50
1.40 ×
P90 3.00×
Your win rate of 25.2% is in line with the category baseline of 26.7%. The payoff ratio of 1.18× is below the baseline median of 1.40×, which typically weighs heavily on the expected value. Baseline source: BLS Business Employment Dynamics survival (US-SMB-01..08) × Fed Small Business Credit Survey profitability (US-SMB-10..11).
Baseline source: BLS Business Employment Dynamics survival (US-SMB-01..08) × Fed Small Business Credit Survey profitability (US-SMB-10..11)
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Action plan
Sized to the risk budget of your profile: Working professional.
Recommendation: NO_GO — under your current win-rate and payoff assumptions the expected value is negative. This is not where your money and time should go.
- The expected value is negative. That is arithmetic, not a lack of nerve.
- Two ways forward: (a) restructure the inputs — less cash, more time, or a smaller scope — until the expected value turns positive; or (b) move the resources to a higher-ranked GO opportunity in your portfolio.
- Save this decision and recompute every three months. Category win rates and payoff ratios move over time.
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Sensitivity analysis
How much the expected value moves when each variable is swung ±20%, ranked by impact. The top two are the ones worth researching before you commit.
- · The tornado analysis identifies Win rate (p) as the variable the conclusion is most sensitive to: a ±20% swing moves the expected value by $79,182. Spend your research budget here first.
- · The second most sensitive variable is Payoff ratio (b) (expected value swings $42,793); the remaining inputs matter markedly less.
- · A quick test for whether to keep researching: buy the information only if it costs less than one fifth of the expected-value swing it would resolve.
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Monte Carlo distribution
10,000 simulated outcomes, seed demo-tier2-cafe — rerunning with the same inputs gives the same distribution.
P5
-$1,046,722
Median (P50)
-$267,857
P95
$1,446,092
Probability of a positive outcome
25.4%
Across 10,000 Monte Carlo runs: P5 = -$1,046,722, P50 = -$267,857, P95 = $1,446,092, and the probability of a positive outcome is 25.4%. The distribution is right-skewed — a long upside tail carries most of the value.
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Scenarios
Bull, base and bear, moving win rate and payoff ratio together by ±15%.
Scenario analysis (win rate and payoff ratio moved together by ±15%): bull = -$114,897, base = -$163,045, bear = -$206,379. The $91,481 gap between bull and bear measures how fragile your assumptions are — the wider it is, the more due diligence pays for itself.
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Counterfactual matrix
What the expected value becomes at other combinations of win rate and payoff ratio — how wrong your assumptions can be before the answer changes.
The counterfactual grid shows that expected value turns non-negative once the win rate reaches 20%, or once the payoff ratio reaches 0.5×. Treat those two lines as the minimum bar any further evidence has to clear.
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Assumptions
Every input behind the numbers above, in one place.
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Reproducibility appendix
Everything needed to recompute this report yourself.
Core formulas
EV = capital × (p × b − (1 − p)) f* = (b·p − (1 − p)) / b RAROC = EV / (capital × σ)Python
from models.feasibility_model import expected_value, kelly_fraction, raroc, go_no_go
p, b, sigma, capital = 0.252, 1.176, 1.4, 361000
ev = expected_value(p, b, capital)
kelly = kelly_fraction(p, b)
rr = raroc(ev, capital, sigma)
print(ev, kelly, rr, go_no_go(ev, kelly, 0.20, rr))TypeScript
import { expectedValue, kellyFraction, raroc, goNoGo } from "decision-lab/lib/feasibility";
const p = 0.252, b = 1.176, sigma = 1.4, capital = 361000;
const ev = expectedValue(p, b, capital);
const kelly = kellyFraction(p, b);
const rr = raroc(ev, capital, sigma);
console.log(ev, kelly, rr, goNoGo(ev, kelly, 0.20, rr));Both implementations are in the repository and are kept in agreement by golden-parity tests: models/feasibility_model.py and lib/feasibility/.
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Sources and disclaimer
- · Kelly J.L. (1956). A New Interpretation of Information Rate. Bell System Technical Journal.
- · Markowitz H. (1952). Portfolio Selection. The Journal of Finance.
- · Sharpe W.F. (1966). Mutual Fund Performance. The Journal of Business.
- · Kahneman D. & Tversky A. (1979). Prospect Theory. Econometrica.
- · Industry baseline: BLS Business Employment Dynamics survival (US-SMB-01..08) × Fed Small Business Credit Survey profitability (US-SMB-10..11)
- · Decision Lab methodology
- · Full business plan (PDF)