Business Decision Analysis for Cases with Probability Data

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  • 0:04 Probability Data Definition
  • 0:41 Calculating Probability
  • 2:17 Approaches to Probability
  • 4:45 Lesson Summary
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Lesson Transcript
Instructor: Tara Schofield
Making business decisions doesn't have to be confusing or overwhelming. By understanding probability, you can determine what will likely happen based on a variety of different factors. This lesson explains probability data and how it can be used for business cases.

Probability Data Definition

Making good decisions is a vital part of a successful business. However, making good decisions doesn't come easily. There needs to be a way to look at options, understand possible outcomes, and measure what may happen with different decisions. A probability is a calculation that helps determine what will happen. Probability data is analyzable information that can be used to figure out what the best decision may be, based on what could happen. Creating a calculation with probability data helps to evaluate different possible outcomes. Calculating probability provides a measurable way to compare options and make a business decision.

Calculating Probability

The formula to calculate probability is:

probability = events / number of outcomes

Let's look at an example. What is the probability you will roll a 6 when you throw a standard die?

probability of rolling a 6 = 1 throw / 6 possible numbers on the die
probability of rolling a 6 = 0.1667

But, what does the outcome of a probability calculation mean?

There are two basic aspects to a probability calculation:

1. A probability of zero means there is no chance the event will ever happen. A probability of 1 means the event is 100% going to happen. The range between 0 and 1 is the likelihood that the event will happen. The closer the probability is to 0, the lower the chance the event will happen. The closer the probability is to 1, the more likely the event will happen. Based on the die example, the probability of 0.1667 is a very low probability. Because there are 6 options on the die, the chance of rolling a specific number is pretty low.

2. If you add up all the possible results of an event happening, the total must be 1. In other words, when all the possible outcomes are considered, there are no other options, 100% of the potential results have been included.

What is the chance that if you roll a dice, you will get a 1, 2, 3, 4, 5, or 6? The probability is 100% because you have included all of the possible outcomes that can happen when you roll the dice.

Approaches to Probability

To understand probability, there are two approaches we need to discuss: the objective approach and the subjective approach.

The objective approach is based on actual events that can be observed. With the objective approach, you can easily get a definite answer because the event is measurable. A very simple example is flipping a coin 20 times. Each time you flip a coin, that coin will either come up heads or tails. You can record each flip to determine how many times heads comes up and tails comes up out of 20 coin flips. You can guess how many tails you will get before you start your coin flips and will be able to compare your guess with the actual results.

The subjective approach is more difficult to measure and based on guesses. It considers events that may not have a definite value attached that allow a definite calculation of the outcome. It's subjective, meaning preferences, goals, desires, and negative expectations affect the chance of something happening. Likewise, subjective approaches can involve emotions and interaction of other people, making it even more difficult to analyze.

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