Most business decisions made in the modern world relate to some aspect of probability (Ellina, Mascarenhas & Theodossiou, 2020). While the focus may be laid on formulas and statistical calculations used in defining probability, underneath these lie fundamental concepts that determine whether and how much interactions of events affect likelihood (Ellina, Mascarenhas & Theodossiou, 2020). Together, probability concepts and statistical analyses allow managers to make sound business decisions, even when they are being made in uncertainty times. An example of probability in action is using the expected value principle to determine the best course of action in an unfamiliar circumstance.
An example of applying probabilistic expected values in making a managerial decision is expanding a business in a second location. A small manufacturing company in Oregon is considering adding a second plant in Washington state. The expansion could allow the company to manufacture more products and earn more profit. The management of the company is struggling with the best way of implementing the expansion. One way to approach this situation is by using the expected value of different outcomes. The expected value of outcomes is the weighted payoff based on probabilistic calculations.
The manufacturing firm has done three market research and feasibility studies. The first study shows a 25% chance that the company can make a profit of $1.08 million in the first year of business; all factors held constant. The second study shows a probability of 40% of making a profit of 1.2 million dollars in the first year of operation. The third study has found a 15% chance that the manufacturing plant could lose $100,000 in the first year of business. The management is tasked with the role of determining which course of action to take.