Application of Probability in Finance

Oluwafemi Olafusi Written by Oluwafemi Olafusi · 1 min read >

In finance, the probability is applied in project management to make an informed investment decision. A cost of confidence level is estimated in probability against project cost. The inherent risk is weighed against the cost of executing the project. It is called the P50 and/or P80 confidence level/s to estimate cost.

The probability of 0 i.e P0 indicate that the project cost will likely be lower. P100 indicate that all risk is possible at their estimated cost and the project is not likely to be delivered on time.

Application of Probability in Marketing

Probability is applied in social media marketing. The social media platforms use probability theory to determine how each marketing strategy will work out and what the outcome is most likely going to be. This is possible with the large amount of data the system is exposed to for an informed decision. The Probability theory is used to develop an algorithm that determines the result of marketing efforts or decisions made.

All social media platforms encourage users to use their Analytic platforms to recommend the best result. For example, Facebook helps to create a custom advertising plan based on the goals you want for your business.

Google Ads also provide Google Ads Automation Tool to ensure relevant pages are shown to relevant people. The backend is probability theory which the analytics rides on.

Application of Probability in Operations

Probability applies to manufacturing in numerous practical instances. Manufacturing businesses can use probability to determine the cost-benefit ratio or the transfer of a new manufacturing technology process by addressing the likelihood of improved profits. In other instances, manufacturing firms use probability to determine the possibility of the financial success of a new product when considering the competition from other manufacturers, market demand, market value and manufacturing costs. Other instances of probability in manufacturing include determining the likelihood of producing defective products, and regional need and capacity for certain fields of manufacturing.

Purpose of Probability in Operations

Probability is applied in manufacturing operations to positively inform the decision-making process. For example, a business owner can know where to open a business and the type of business with the information provided by probability on the capacity for manufacturing and regional need. The success rate of an operation and the best route for high profit can be determined by probability.

Application of Probability in Logistics

The logistic process which includes shipment, movement of materials, supply, consumption of materials,  supply, shipment, and movement of materials is described by the normal law of probability distribution. A distinctive feature of this distribution is the presence of a pronounced symmetry of random variables relative to their average value. For these processes, the normal law applies to all building materials, certain assortment groups or individual names of resources.

Application of Probability in Managerial Decision

A managerial decision can make or mar a business, managers need to make the right decision most of the time. Probability can be used to analyse the outcome of the decision made. For example, probability distribution in percentage can be used to determine the breakeven point of business and the chances of generating a particular revenue. If the probability distribution is less the 10 per cent, it is likely the business will not generate the required revenue.


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