Application of Probability in the Business world

Nicholas Uchenna Ugwu Written by Nicholas Uchenna Ugwu · 2 min read >

Probability is the extent to which an event is likely to occur, measured by the ratio of the favourable cases to the whole number of cases possible. It is a branch of mathematics that deals with the occurrence of a random event. Probability theory assumes that it is difficult to determine the outcome of random events before they happen. However, there are several likely outcomes for any event. The actual outcome can only be determined by chance.

The probability theory uses key formal concepts to describe the chances of a particular outcome happening. These concepts include:

Sample space — A collection of possible outcomes from a random experiment.

Probability distributions — Statistical functions that define the likelihood of obtaining possible variable values. A variable’s value fluctuates depending on the underlying probability distribution.

Random variables — In probability distributions, random variables are numerical descriptions of outcomes from statistical experimentations.

Random experiment — Probability theory involves repeating trials several times to obtain a set of well-defined possible results. These trials are called random experiments. Tossing a coin is an excellent example.

Variance — A measure of distribution that describes how a random variable deviate from the mean.

Probability and statistics are important for the development of economic and financial theories. They are also used to test the validity of those theories through robust analysis of real-world data. They could be applied in shaping effective monetary and fiscal policies as well as developing pricing models for financial assets

Probability distribution is used by investors to predict returns overtime on assets like securities and to hedge their risk. Usually, stock returns are often thought to be normally distributed and they show kurtosis with negative and positive returns.

In financial decision, the expected result of an independent event can be measured using probability. In this case, the expected value can be compared to the values of other choices. This value may be figured out using the equation E(V) = ∑(Pn x rn).

Through the application of probability, managers can improve spending, financial analysis and planning and overall operational and competitive strength by tracking and analyzing financial data generated by statistical budgets.

In marketing, probability is used to generate models that attempts to describe or predict behaviour. These models can be used to study and describe customer’s behaviour; understand market level pattern and their origin in customer’s behaviours as well as provide benchmark for comparison, and then applied in forecasting. The probability of a customer buying your product varies. For this reason, marketing strategies must be dynamic and adaptable to reach the right audience at the right time.

Probability plays a key role in improving decision-making in the face of uncertainties. It helps decision-making objective and data-driven rather than based on instinct. Analysis anchored on probability distribution help companies frames its values in terms of likely sales level, wore-case and best-case scenario. It could also help in budgeting, expenses, pricing as well as products distribution across various regions. It could help businesses that lack proven records of sales and cost in making business decisions. The company can base its plan on the likely scenario but being mindful of the other alternatives. Probability models can greatly help businesses in optimizing their policies and making safe decisions thereby increasing profitability and success in business.

In Logistics, Probability can be applied in supply chain risk management to handle suppliers’ failure and increase in prices or scarcity of raw material, demand fluctuations and inventory shortages as well as disruptions in transportation industries. Managers can base their supply chain plan on the likely scenario while bearing in mind other possible alternatives.

Probability provides the basis for all statistical inference by allowing the experimenter to assess the chance of various outcomes. It is fundamental in analyzing decision-making problems involving incomplete information.

It is necessary therefore, that managers and business owners get use to application of probability theories in their various areas of business activities as it can play a crucial role in strategic plans to enhance improvement and growth in various areas.



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