CLASSICAL PROBABILITY“Classical probability is the frequency of an event occurs divided by total number of possible outcomes. This can only be used when all events are equally likely. For example: (1)The chance that a woman gives birth to a male or female baby (p = 0.50 or ½), (2)The chance that tail or head appears in a toss of coin (p = 0.50 or ½), and (3)The chance that one spot will appear in die-rolling (p = 0.16 or 1/6).
P(A) = NO OF OUTCOMES FAVORABLE TO A/ NO OF POSSIBLE OUTCOMES = n/N
Application of Probability in Business.
Purpose
Effective business professionals collect data on operations and then make decisions. Typically, conducting large-scale experiments are too costly, so small-scale experiments produce all the data used for analysis. This approach includes some risk of error. For example, when you have thousands of customers, you can’t ask each one to rate your product or service. Instead, you survey a select few, analyze the results and take into account the chance of being wrong based on incomplete information.
Benefits
Using probability concepts in decision-making typically involves analyzing statistical data and models developed by experts. The process allows business professionals to look at a problem objectively, removing personal opinions. You can report information more concisely and consistently. This helps you and your company make better and more reliable decisions. Additionally, you can compare your results to an industry standard or a competitor’s results. For example, you can indicate on a product specification data sheet for a computer storage product that you have a target of a 1 in 1020 probability of uncorrectable data. That makes your product seem very reliable and desirable for purchase.
Usage
By assigning the likelihood of the occurrence of an event, you can make better-informed decisions. Using a classical approach, you assume all possibilities are equally likely and that what has happened in the past will occur in the future. Using a subjective approach, you use your personal experience to estimate the probability of something occurring. Anchoring is the practice of assessing the probability of an event based on past experiences and factoring in new information to assign a probability value. Using the Delphi technique, you ask a set of experts to submit their estimated probability of an event occurring and resubmit input until everyone agrees, typically after a lengthy period involving critique and refinement. By using probability concepts, theories and techniques, you can solve business problems more effectively.
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