PROBABILITY – A TOOL FOR DECISION MAKING

The use of probability in deciding business decisions has tremendously helped our everyday decisions which we face from time to time. The uncertainty of the future has made decision making difficult for prospective, financial, and otherwise. With all the many problems we are faced with we naturally do not look up to the heavens alone even if we are emotional attach to it but instead, we list the risk and return/benefits of the various options in our mind or we have been able to write down, and now take time to choose those that maximises the probability of a beneficial outcome. Hence, these might not necessarily turn out to be the best of decisions but will evolve when we try to increase the chances to be.

Having the knowledge of probability as a guide will help us at least to estimate the future outcome of the events based on our decisions.

Decision making is a critical factor for the survival of any organization. The process involves analysing problems, or situations, gathering information, evaluating alternatives and monitoring or proffering solutions through action plans we have taken note of. In this whole context of the organization, probability facilitates the decision-making process. It shows us the relationship between probability and decision-making.

To further understand the importance of probability and decision-making and how connected they are, probability assumes the difficulty to determine the outcome of random events before they occur. Even though there are several likely outcomes for any event and hence the actual outcome can only be determined by chance.

This process of decision-making during uncertainty can be seen in financial decisions we make for our organisations as managers as well as those financial investments decisions we put our monies into with the expectation that the pay off in the future will be bigger. How do we decide if such risks are good or not. This financial decision can only be evaluated with the perception that we have taken a good bet. With our knowledge at that time of making such investment decisions, how did we make the choice that maximized the probability of a profitable outcome, even without the profit or gain guaranteed.

In other words, for the evaluation of sound investment, we need to look at the expected value in the future not minding its worth now.

To help us in calculating the expected value of our investment, we need to take into consideration the followings:

1. The various possible ways in which our decisions for the future might turn out as relevant to the bet made.
2. The value of our investment in those different circumstances, and
3.  That the probabilities of those different circumstances will come to pass.

The expected value of our investment is the weighted average of the values in the different circumstances; hence it is weighted by the probabilities of each circumstance. It is calculated by the expected value (EV): The formula is EV = P(E1) x V(E1) + P(E2) X V(E2) + ……. + P(En) X V(En).

The formula is a sum; each term in the sum is the product of a probability and a value.

The different types of probability can be of help to us. It can either be Objective or subjective in nature.

 We can look at marketing as a core business function that assist companies to promote their products or services, which attracts buyers, and with intent to increase sales volume. It is important to ask how probability is involved in this business decision making process in marketing.

Using the probability tools to determine or understand that consumers will purchase their products or services which is constantly fluctuating. The chances of a customer buying a product depends on price, tastes, preferences, and trends as well as the repeat sales which is dependent on customers previous experience and satisfaction. Companies take time to develop strategies to increase the likelihood of customers buying their products.

While organizations apply the principles of probability and uncertainty in business decision-making, the use of certain model to drive their strategies and policies in other to contribute to the business success are clearly seen with the scenario analysis, sales forecasting, risk evaluation conducted, and sensitivity analysis. All these are to drive the business strategies of any organization.

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