Business decisions are multi-faceted, they are usually based on the analysis of uncertainties. These ranges from the chance that if we increase supply of our product currently in the market, there will not be excess supply that is, the demand will be there to take the extra supply. Or the likelihood that the introduction of a new assembly plant will ensure that we meet production target. Uncertainties may also be that the completion time set to construct a bridge will be met. What about uncertainties that the new IT startup that we have just invested in will return profit to us as contained in the pitch presented by the promoter of the company?
Probability is a numerical measure of the likelihood that an event we are faced with will occur. It is usually a measure of the degree of uncertainties associated with the occurrence of an event under consideration. What we also know about probability is that the value usually ranges between 0 (zero) and 1 (one). A probability value of zero indicate that the event will not occur which means that with the value of zero, the event in question is an impossible event. When we have a probability of one, it shows that the event is certain to occur, such event is referred to as sure event. Other possibilities between zero and one represent the varying degrees of likelihood that an event will occur, therefore, maximum value of a probability is one, while the minimum is zero and all other values lies in-between.
We usually use probability to measure or analyse the uncertainties associated with future events in business decisions. To use probability, the first step is to define the experimental outcome for which we want to analyse. The concept of experiment is very important, but we are not discussing scientific experiment here. Why not scientific experiment? This is because the outcome of such experiment under the same condition will usually product the same outcome. But a social experiment which we are more concerned with will result in different outcome under the same condition and such situation we say that the result of the experiment is random.
Sample space are the set of all possible experimental outcomes. Any one particular experimental outcome is known as sample point. A sample point is therefore is an element of sample space. Probability by mathematical definition is a ratio of a sample point over sample space. For example, if I roll a die, the possible outcomes are one, two, three, four, five and six. These are the sample space which represent the possible outcomes of rolling a die. If we decide to calculate the probability of rolling a two for instance, that will be one-sixth and this is because, a two will occur one in six times a die is rolled. The uncertain part of it is that if we roll a die, we really cannot say for certain what the outcome will be but we know we know we can have six outcomes.
In conclusion, I can say that probability is a very good tool to use in calculation the uncertainties around business decision and therefore every business decision maker should be able to do simple probability calculation.
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