Chapter 6 - Probability: Understanding Random Situations

Abstract

Our goal in this chapter is to understand uncertain situations, at least to the greatest extent possible. You will learn about probability and uncertainty; here is a guide to these concepts. Please interpret a probability number (from zero to one) as an exact number indicating how likely an event is to happen (representing the percentage of the time that the event would happen under similar circumstances) so that probability 0.37 represents a 37% chance that the event happens. Probability numbers can come from previous experience (relative frequency as a percentage), from a mathematical statement (theoretical probability), or can be simply made up (subjective probability, yes it is permitted to use someone’s opinion here). New events of interest to you can be defined from other events, so we have the union of two events (that happens if one or the other or both events happen, such as “at least one new product is successful”), the intersection of two events (that happens if both events happen, such as “disk failure and backup failure”), and the complement (that happens if an event does not happen). Of special interest to managers is conditional probability that shows how the probability of an event can (and must) change when new information becomes available (think about the probability of success changing when the test marketing campaign was successful). Specific rules govern how these new probabilities must be calculated, and one of the best (ie, easiest) ways to apply them is to use a structure: the probability tree (a kind of decision tree) to organize and focus your thoughts in an organized way. There are other methods for visualizing probabilities, and you will also see the Venn diagram and the joint probability table.