Probability Concepts and Applications

Probability concepts are used determine how likely it is for something to happen. Investopedia states that a “probability refers to the percentage chance that something will happen, from 0 (it is impossible) to 1 (it is certain to occur), and the scale going from less likely to more likely (Investopedia, 2017).” By using this scale to estimate how probable something is likely to occur, we can be better prepared for everyday business and life. Probability is used in many of our personal and professional lives and sometimes we do not even realize we are using them. For example, many of us look at the weather forecast for the upcoming day or week and it is filled with probabilities. In our professional lives we may see probabilities in the form of a project being funded or not. It is amazing how probabilities can so present in our lives when you really stop to consider how many we encounter or develop on our own each day.

There are two types of probability, “the objective approach and the subjective approach (Render, Stair, Hanna, & Hale, 2018).” Objective probabilities can often be found using a logical method using information that will not change, hence objective. So if you know the all the possible outcomes and you are looking for a specific one, you simply must divide the one by the others to determine the probability of that particular outcome occurring. This can very useful when a more definite probability is required for the project or situation. Whereas in the subjective approach, not all of the possibilities are known, so estimation is used based on the experience of the analyst. This approach is less accurate but can still be a good reference when working on a project in early stages when not all information is available yet.

Probability distribution is defined as the “set of all possible values of a random variable and their associated probabilities (Render, Stair, Hanna, & Hale, 2018).” When everything is already known, it becomes much easier to distribute the information to determine all probabilities associated with the set of variables. A normal distribution is comprised of two components, the mean and standard deviation of the distribution. Both of these components are easy to identify due to the “bell shape” present in normal distribution.

Understanding distribution can be an asset for any business project. For example, a business is deploying 100 new personal computers and the mean time to set up the new computer at a desk is 3 hours and the standard deviation is 30 minutes. If the business has allotted 400 hours to the IT department to complete the deployment, there is a high probability that all the computers will be deployed on time. If they reduced the allotted time to 200 hours, there would be a low probability that the computers would be deployed on time.

References

Investopedia. (2017, December 21). Basic Probability Concepts. Retrieved from https://www.investopedia.com/exam-guide/cfa-level-1/quantitative-methods/probability-subjective-empirical.asp
Render, B., Stair, R. M., Hanna, M. E., & Hale, T. S. (2018). Quantitative analysis for management (13th ed.). Harlow, England: Pearson Education Limited.