# PROBABILITY AND ITS APPLICATIONS IN BUSINESS Probability Probability theory is an important part of statistical theory that bridges descriptive

inferential statistics. It is the science of uncertainty or chance, or likelihood. and

A probability value ranges between 0 and 1 inclusive and represents the likelihood that a particular event will happen. A probability value of 0 means there is no chance that an will happen and a value of 1 means there is 100 percent chance that the event will happen. Understanding probability is helpful for decision-making. Conducting an experiment or sample test provides an outcome that can be used to compute the chance of events occurring in the future. An experiment is the observation of some activity or the act of taking some measurement. Whereas,an outcome is a particular result of an experiment. The collection of one or more outcomes of an experiment is known as an event. For example, a market testing of a sample of new breakfast cereal, new beer, new wine, new magazine, etc. gives the Director of Production or Director of Marketing a company a preliminary idea (outcome) whether consumers would like the product if it is produced and distributed in bulk. There are three definitions of probability. The first one is known asclassical probability. The classical definition applies when there are n equally likely outcomes to an experiment. It is obtained by dividing the number of favorable outcomes by the total number of possible outcomes. The probability of certain events is already known or the resulting probabilities are definitive. 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). The second one is empirical probability that is based on past experience. This is determined dividing the number of times an event happens by the total number of observations. For example: (1) 383 of 751 business graduates were employed in the past. The probability that a particular graduate will be employed in his or her major area is 383/751 = 0.51 or 51%. (2) The probability that your income tax return will be audited if there are two million mailed to your district office and 2,400 are to be audited is 2,400/2,000,000 = 0.0012 or 0.12%. The third is a subjective probability. Subjective probability is a probability assigned to an event based on whatever evidence is available. It is an educated guess. Unlike empirical probability, it is not based on past experience. Subjective probability is obtained by evaluating the available

options and by assigning the probability. "There's a good chance I will get a pay raise". The second method says Davis et al. Examples of events that require computing subjective probability: (1) Estimating the probability that a person wins a jackpot lottery. These interpretations are based on the methods through which we arrive at conclusions about probability and possible outcomes. "If I get an MBA my chances of succeeding in the job market will increase substantially". I would have to sit and throw it a significant number of times and based on how it lands arrive at a conclusion regarding the probability that a specific occurrence or the way in which it could land would indeed occur. departures and arrivals at work. accomplishment of daily endeavors. Davis et al.219 tells us that there are two distinct interpretations of the term probability. making such a determination on the basis of a few throws of the die would only make me arrive at a poor conclusion. makes assumptions about the physical world to determine the probability of a particular outcome. ." In the case of the die. "Honey. and "I will probably be there by noon". In using it we articulate in casual way our subjective estimates of probability regarding completion of deadlines. many repetitions of the situations. play or home. are all examples of our daily use of personal probability theory. Clearly. I'll probably be late for dinner". in Statistics and Research Methods for Managerial Decisions. p. If I assume that dice are made in a way such that they are likely to land on any of their six surfaces and that the way in which I throw one die has absolutely no effect on how it lands I could conclude that the probability of number six showing on top is one is six or 1/6. The first method says Davis et al. Explanation The word "probability" in one form or another is part of our daily vocabulary. consists of "observing the relative frequency over many. (2) Estimating the probability that the GM will lose its first ranking in the car sales.

probability theory is used in the calculation of long-term gains and losses. I propose that the level of technology as a service offering to its customers and public ownership of the company are of substantial influence in making decisions based on short and shallow analysis of their probability for success (some day I may take this one on and try to conduct a study). you may as well gamble you company's money away shooting craps (dice). You can see this on the news almost every day or by reading The Wall Street Journal. the bottom line in this economy is driven by expense. This is how a company whose business is based on risk calculates "probability of profitability" within acceptable margins. My point is that if you can't invest the time and resources to conduct proper research. Clearly. . points out on page 300 Carl Sagan's belief the "probability of a major asteroid hitting the Earth soon is high enough to be of concern.using little research available. An example of this is the way in which life insurance companies calculate the cost of life insurance policies and is based on how many policy holders are reasonably expected to die within a year versus revenue generated from other policies extended. This is the way in which most businesses particularly in the Information Technology industry must make decisions these days . Davis et al.APPLICATIONS In business. so much more in public owned companies where allocation of resources to research and investigation are often perceived as frivolous by stockholders. In this scenario it is important to point out that in order for a company to mitigate the risk associated with loss of revenue it must issue a substantial number of policies. My decision to use of the throw of dice in this example is not probabilistic but chosen for a very specific reason in describing the way in which I have seen business decisions made by companies. devoting small resources to discover answers and in a highly competitive environment." It is obvious that Sagan could not arrive at this conclusion through the application of long-term frequency probability but rather on his knowledge of astronomy.

Ohio: South-Western. 2001. /An-Introduction-to-Probability-and-its-Applications-by-Larsen-and-Marx/ .REFERENCES: Davis et al. Statistics and Research Methods for Managerial Decisions [University of Phoenix Custom Edition]..