Chapter 5a Probability_1

Chapter 5a Probability_1 - Click to edit Master subtitle...

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Unformatted text preview: Click to edit Master subtitle style © Professor Thomas R. Sexton © Professor Thomas R. 11 A Survey of Probability Concepts Professor Thomas R. Sexton College of Business Stony Brook University © Professor Thomas R. © Professor Thomas R. 22 Uncertainty Uncertainty is central to business decision making. Will there be high demand for our new product? Will interest rates go up? Will inflation increase? Will my competitors lower their prices? © Professor Thomas R. © Professor Thomas R. 33 We Use Probability to Discuss and Analyze Uncertainty Probability provides: Language for discussing uncertainty Logically sound foundation for analyzing uncertainty Probability enables business decision makers to make better decisions in circumstances involving uncertainty. © Professor Thomas R. © Professor Thomas R. 44 Example A venture capitalist (VC) must decide whether to invest $10 million in a start- up pharmaceutical firm that is developing a new drug to cure diabetes. If the drug is successful, the VC will make a profit of $100 million. If the drug is unsuccessful, the VC will © Professor Thomas R. © Professor Thomas R. 55 Analysis If the VC decides not to invest, then his or her profit is $0. If the VC decides to invest, then his or her profit is $100 million if the drug is successful −$10 million if the drug is unsuccessful © Professor Thomas R. © Professor Thomas R. 66 Expected Profit Let p = probability that the drug is successful. Then 1 – p = probability that the drug is unsuccessful. If the VC decides to invest, then his or her expected profit is © Professor Thomas R. © Professor Thomas R. 77 The Decision Using the expected profit criterion, the VC should invest if and only if 110 p – 10 > 0, or p > 10/110, or p > 0.090909… Therefore, all the VC needs to know is whether the drug’s probability of Click to edit Master subtitle style © Professor Thomas R. Sexton Let’s Make a Deal! © Professor Thomas R. 88 © Professor Thomas R. © Professor Thomas R. 99 Sources of Probabilities We obtain probabilities from three types of sources: Probability models: Flip a coin, roll a die Relative frequencies: Observed data Subjective estimates: Events never before observed © Professor Thomas R. © Professor Thomas R. 1010 Probability Models Flip a fair coin P(Heads) = ½ Roll a fair die P(4) = 1/6 P(2 or 5) = 2/6 = 1/3 Other commonly used probability models: Binomial Hypergeometric Poisson © Professor Thomas R. © Professor Thomas R. 1111 Probability Models Advantages Easy calculation of probabilities Explicit statement of assumptions...
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This note was uploaded on 09/17/2009 for the course BUS 215 taught by Professor Thomassexton during the Fall '09 term at SUNY Stony Brook.

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Chapter 5a Probability_1 - Click to edit Master subtitle...

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