2006-09-15 07:49:18 · 9 answers · asked by t2 1 in Business & Finance ➔ Other - Business & Finance
Probability can be used in decision-making by considering two factors.
The first is the "payoff" of an outcome (note: not an action). For example, if I decide to speed on the freeway and arrive at my doctor's appointment on time, what is the payoff? It could be that you don't lose your appointment and avoid a $100 cancellation fee.
The second consideration is the "probability" of an outcome. For example, what is the probability that I speed on the freeway and arrive at my doctor's appointment on time. It could be 90%.
You then calculate the expected value (the sum of payoffs * probabilities) to decide which action is the most advantageous.
So let's work through an example. You have a choice to speed or not to speed to make an appointment with your doctor on time.
If you speed you have a 90% chance of making it on time and you keep your appointment. Keeping your appointment is worth $100 to you because if you have to make another appointment that is the cancellation fee they impose on you. Now if you speed you have a 5% chance you will have a crash and incur $1000 of damages and a 5 % chance you will get a ticket and incur a $200 police fine. So your expected value of speeding is 0.9*$100-0.05*$1000-0.05*$200 = $90 - $50 - $10 = $30.
If you don't speed you have a 50% chance of making it on time and you keep your appointment. Keeping your appointment is worth $100 to you because if you have to make another appointment that is the cancellation fee they impose on you. Now if you don't speed you have a 1% chance you will have a crash and incur $1000 of damages. So your expected value of not speeding is 0.5*$100-0.01*$1000 = $50 - $10 = $40.
Given the expected value of not speeding is higher than the expected value of speeding, in this particular case you should choose to not speed. Please note however that this decision is dependent on the accuracy of your assumptions on payoffs and probabilities.
2006-09-15 08:22:32 · answer #1 · answered by ribordoli 2 · 1⤊ 0⤋
Probability is a key concept as far as decision making is concerned. Since businesses usually operate in environments that are characterized by high uncertainty and risk, then anticipating the outcomes of any decision made by the firm is crucial to its success. This is where the use of probability comes in. Probability is used in various business decision-making techniques, from simple decision tree models, to the more complex Monte Carlo simulation models.
In decision trees, the returns from each of two or more separate projects are evaluated on the basis of the sum of the values of the possible outcomes for either project. These values are calculated by multiplying the probability of each outcome (good, moderate or poor) by the payoff of each outcome. The management team can then choose the project that is going to afford them the greatest possibility of a favourable outcome, the cost of each project factored into the decison.
Hope this helps.
2006-09-15 15:38:17 · answer #2 · answered by Nick 2 · 0⤊ 0⤋
Hi, we use probability in statistics for knowing the chance of happening one thing. But we cant expect the things surely by using probability. But come to the decision making most of the organisations using probability as one factor. It is structural way to take decisions. But adding other ingredients like brain storming, questioners and case study methods will give best decision.
2006-09-16 00:43:28 · answer #3 · answered by chindu 2 · 0⤊ 0⤋
LIFE knows all probabilities,if you choose to ask LIFE for the best answer for you and the advancement of your life for the most good,then you must accept the responsibility for that choice.
Ask and it is Given.
Listen to the voice inside your head,allow your intuition to guide you,you are a part of LIFE and can never be seperated from LIFE.
2006-09-15 15:19:37 · answer #4 · answered by LIFE 1 · 0⤊ 0⤋
Running the scenario through a monte carlo simulator, using sensitivity analysis. You can also build a multiple regression model to test ourcomes of different decesions.
2006-09-15 14:58:03 · answer #5 · answered by Anonymous · 0⤊ 0⤋
It is a part of the process, by looking at history, economic indicators, etc. Brainstorming helps.
I used a lot of "What If" in my business, and carried it as far as I could.
A quote I read once.
"Do what is right, for the most people, over the longest period of time".
Dr. Greene
2006-09-15 14:55:28 · answer #6 · answered by ed 7 · 0⤊ 0⤋
Law of probabilities as it applies in business quantifies the likelihood of success of an idea/strategy/venture and the opportunity cost of not implementing the idea/startegy/venture....
in short, it answers the questions of "will this be a success" and "can i afford not do it"
2006-09-15 15:00:38 · answer #7 · answered by boston857 5 · 0⤊ 0⤋
Probably decide later.
2006-09-15 15:00:23 · answer #8 · answered by L S 3 · 0⤊ 0⤋
It's a fifty-fifty chance; it's either good for you or not.
2006-09-15 14:51:36 · answer #9 · answered by frisco415 3 · 0⤊ 0⤋