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The employees of a leading mail-order computer software company are secretly thinking of breaking away to form their own rival company.

The employees of a leading mail-order computer software company

are secretly thinking of breaking away to form their own rival

company. This would require an investment of $3 million and the

employees will make the decision largely on the basis of the net

present value of this investment. To help them with their decision a

risk analysis model has been formulated. Development of the model

involved estimating a large number of probabilities including those

set out below:

(a) probability distributions for the size of the market (measured

in total turnover) for each of the next five years - following the

recent launch of a major new international software product,

the employees have experienced a buoyant market over the last

few months;

(b) probability distributions of the market share that could be

obtained by thenewcompany in each of the next five years - these

distributions were obtained by first estimating a most likely

value and then determining optimistic and pessimistic values;

(c) the probability that magazine advertising costs would increase

over the next five years - this was considered to be less likely

than an increase in advertising costs resulting from increased

costs of paper and an associated fall in the number of computer

magazines.

Discuss the heuristics which the employees might have employed

to estimate these probabilities and any biases which might have

emanated from the use of these heuristics.

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