Probability & their application in Business

ALLAMA IQBAL OPEN UNIVERSITY

(Department Of Business Administration)

SEMESTER: AUTUMN 2010

BUSINESS MAHEMATICS & STATISTICS

Code no 523

SIDRA MUDASSER
AH 525501

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Probability & their application in Business

ASSIGNMENT # 2
Probability & their application in Business

ACKNOWLEDGEMENT

I sincerely feel that the credit of this project work could not be narrowed to
only one individual as the whole work is outcome of integrated efforts of my
instructors and their hand outs and their cooperation which results into
completion of this project.

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Probability & their application in Business

ABSTRACT

Integration of MS office has been designed to simplify the use of the various
Microsoft Office tools while still offering users the option to continue working with
what is familiar to them. Previously set up templates and forms can continue to be
used by organizations enabling them to seamlessly integrate their existing processes
into new ones with Integration of MS office. This fact alone will promote user
adoption substantially and demonstrate Integration of MS office ease of use.

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Probability & their application in Business

TABLE OF CONTENTS

Probability………….………………………………………………………………….5
Types of Probability..………………………………………………………………….5
Microsoft Excel…………………………………………………………………...10-11
Microsoft PowerPoint
………………………………………………………………..12
Microsoft Access …………………………………………………………………….13
MS office Integration ………………………………………………………………..14
Benefits of Integration ……………………………………………………………….15
Share Point Integration …………………………………………………………...15-18
MS Access & MS excel Integration ……………………………………………...19-23
Case Study of SPO………………………………………………………………..23-33
Conclusion …………………………………………………………………………...35

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Probability & their application in Business

1. PROBABILITY
Probability theory is an important part of statistical theory that bridges descriptive and
inferential statistics. It is the science of uncertainty or chance, or likelihood. A
probability value ranges between 0 and 1 inclusive and represents the likelihood that a
particular event will happen. A probability value of 0 means there is no chance that
and will happen and a value of 1 means there is 100 percent chance that the event will
happen.

Understanding probability is helpful for decision-making. Conducting an experiment

or sample test provides an outcome that can be used to compute the chance of events
occurring in the future.

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Probability & their application in Business
An experiment is the observation of some activity or the act of taking some
measurement. Whereas, an outcome is a particular result of an experiment. The
collection of one or more outcomes of an experiment is known as an event.

For example, a market testing of a sample of new breakfast cereal, new beer, new
wine, new magazine, etc. gives the Director of Production or Director of Marketing a
company a preliminary idea (outcome) whether consumers would like the product if it
is produced and distributed in bulk.

2. TYPES OF PROBABILITIES

There are three definitions of probability. The first one is known as classical
probability. The classical definition applies when there are n equally likely outcomes
to an experiment. It is obtained by dividing the number of favorable outcomes by the
total number of possible outcomes.

The second one is Empirical probability that is based on past experience. This is
determined dividing the number of times an event happens by the total number of
observations. For example:

The probability that your income tax return will be audited if there are two million
mailed to your district office and 2,400 are to be audited is 2,400/2,000,000 = 0.0012
or 0.12%.

The third is a subjective probability. Subjective probability is a probability assigned

to an event based on whatever evidence is available. It is an educated guess. Unlike
empirical probability, it is not based on past experience.

Subjective probability is obtained by evaluating the available options and by

assigning the probability. Examples of events that require computing subjective
probability:
(1) Estimating the probability that a person wins a jackpot lottery.
(2) Estimating the probability that the GM will lose its first ranking in car sales.
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 Probability & their application in Business

3.

BASIC RULES OF PROBABILITY

No EVENTS FEATURES KEY APPLICABL FORMUL

. CONNECTING E RULE A
WORDS
1 Mutually No overlapping The probability Special Rule of P(A or B) =
exclusive events - if one of A occurring or Addition P(A)+ P(B)
event happens the the probability of
other one can’t B occurring
occur at the same
time
2 Not Overlapping/ The probability General Rule P (A or B) =
mutually Concurrent events that either A of Addition P(A)+ P(B)
exclusive – two or more may occur or B – P(A and
(Joint/ events happen at may occur B)
Compound) the same time followed by the
possibility that
both A and B
may occur.
3 Independent The occurrence of The probability Special Rule of P(A and B)
event A has no that A and B will Multiplication = P(A)P(B)
effect on the occur
occurrence of
another event B
4 Conditional Dependent events P(B|A) – General Rule P(A and B)
– the probability of probability that of = P(A)P(B|
a particular event event B will Multiplication A)
occurring given occur given that
that another event event A has
has occurred already occurred
5 Complemen All events in the Event Not Complement P(A) = 1 –
t sample space that occurring – Rule P (~ A)
are not part of the or

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Probability & their application in Business
specified event – Neither/nor will
determined by happen
subtracting the
probability of an
event not
happening from
the probability of
happening

3. DISCRETE PROBABILITY DISTRIBUTIONS

Probabilities values for experiments whose outcomes are numerical are known as
random variables. Random variables can be discrete (have a finite number of sample
space) or continuous (have an infinite number of sample space). An example of
discrete probability distributions is binomial distribution.

Properties of Binomial distribution:

 Each trial (X) may be selected from infinite population without replacement or
from a finite population (N) with replacement.
 Each trial (X) is mutually exclusive and collectively exhaustive
 Each trial (X) has two possible outcomes, success or failure.
 Each trial has a fixed probability of success or failure (π).

5. THE PRINCIPLES OF COUNTING

If the number of possible outcomes in an experiment is small, it is relatively easy to

count them. If, however, there are a large number of possible outcomes, it would be
tedious to count all the possibilities. To facilitate counting, three counting formulas
will be examined: the multiplication formula, the permutation formula, and the
combination formula.

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Probability & their application in Business
A) The Multiplication Formula is:

Total number of arrangements = (m)(n).

Example: If a salesperson has seven shirts and 5 ties to display, 35 outfits are
possible. This means he or she has 35 different ways displaying the outfits. This can
be extended to more than two events. For three events m, n, and o: Total number of
arrangements _ (m)(n)(o).

B) The Permutation Formula

The permutation formula is applied to find the possible number of arrangements

when there is only one group of objects. Order is very important in permutation. Note
the arrangements a b c and b a c are different permutations. The formula to count the
total number of different permutations is:

where:
n is the total number of objects (pool).
r is the number of objects selected at a time.

Before we solve the two problems illustrated, note that permutations and
combinations use a notation called n factorial. It is written n! and means the product
of n(n-1), (n-2), (n-3), (n-4), (n-5), etc. For instance, 5! Means 5 x 4 x 3 x 2 x 1 =
120.

By definition, zero factorial, written 0!, is 1. That is, 0! = 1.

Example: A flag with three stripes of 3 colors can use any of six colors. How many
flags are possible? This is a permutation problem and the order of arranging the flags
is important.
P = 6P3 = 6!
n r = 120

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Probability & their application in Business
(6-3)!

C) The Combination Formula

If the order of the selected objects is not important, any selection is called a
combination. The formula
to count the number of r object combinations from a set of n objects is:

Example: You have 6 colors to

choose from and you wish to choose 3 for a flag. How many choices are possible?
This is a combination problem the order of arranging colors in not important.

nCr = 6C3 = 6! = 20
3!(6-3)!

6. APPLICATION IN THE BUSINESS

In the quest to achieve a sustainable maximum level of profit and profitability in

business, analytical tools are often put into play that address the quantitative
Methods of business.

The use of these tools helps to determine the effectiveness of given programs of
operation and can help demonstrate which areas of business need to be subject to
refinement or adaptation to once more minimize loss and maximize profit.

Through addressing the quantitative methods of business, those in management and

cost- reassessment programs can better understand the forces that are at work in their

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Probability & their application in Business
respective departments and within the business environment as a whole, essentially
accomplishing a greater degree of control over all areas of business.

This paper three investigate many of the commonly- used analytical tools and
concepts that are used to help effectuate decisions in a business environment.

This paper shall break down the investigation of these analytical tools into three
different
areas of study to better limit the discussion: The first area is that of the localized
department, where the analytical methods can be applied to a specific area of business
such as shipping & receiving or order processing.

The second area is that of the business as an entity, where the business is examined as
a separate and whole entity, or the sum of its localized departments. Finally, the third
area shall be the overall business environment in which a specific business is located,
where for example a law firm would be examined according to its position and
business strategies within the entire law industry.

The types of analytical models that shall be investigated in this paper are probability
theory and statistics, utility theory and game theory. Through investigating these tools

in this three- tired framework, the reader will have a greater comprehension of how
analytical tools can be used to accomplish various reforms within a business or the
business sector as a whole.

7. PROBABILITY THEORY AND STATISTICS

This section shall explore the use of the model for probability theory and how this
theory functions within a business environment. Probability theory is almost always
used in respect to statistical figures as this theory is useless without statistics through
which to support the initial assessment.

Introduction to Probability Theory

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Probability & their application in Business

The role of probability theory in analytical methodology has been called the “common
sense approach” to investigating specific areas of study, for probability theory
suggests that the best way of investigating a problem is to combine a previous
knowledge of events with the likelihood of events manifesting again.

The overall assumptions that can be drawn from probability theory have a significant
margin of error (in most circumstances) but the single solution that can be drawn is
what is most likely the situation that will occur given a predetermined set of variables.

Essentially, the nature of probability theory has been traced to standard Aristotelian
logic, which reduces a situation to be applicable to deductive according to the
assumption that a situation can be defined as either true or false.

When a given situation is presented, a researcher can then address the scenario
according to “true” or “false” qualities (as shall be explored at a later point in this
section). This method 2011 119 therefore allows for various generalizations to be
made based upon the available data from pre- existing situations, and is a useful tool
for creating the most likely outcomes for a given scenario.

Take the following citation as a means of getting a better overview of the

methodology and functionality of probability theory in respect to related events, for
this is the area in which probability theory is most frequently utilized in business.
In the following examples, throwing dice is used to illustrate the nature of probability
theory in respect to statistics, where the probability of rolling a specific number is
manifest according to the number of dice used and the times taken to roll the dice.

“Independent or related events?

“One of the important steps you need to make when considering the probability of
two or more events occurring. Is to decide whether they are independent or related
events.

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Probability & their application in Business
Examples:
Independent or Mutually exclusive events

The probability of throwing a double three with two dice is the result of throwing
three with the first die and three with the second die. The total possibilities are, one
from six outcomes for the first event and one from six outcomes for the second,
therefore (1/6) *

(1/6) = 1/36th or 2.77%.

The two events are independent, since whatever happens to the first die cannot affect
the throw of the second; the probabilities are therefore multiplied, and remain 1/36th.

Related or Mutually inclusive events

1. What happens if we want to throw 1 and 6 in any order? This now means that we
do not mind if the first die is either 1 or 6, as we are still in with a chance. But with
the first die, if 1 falls uppermost, clearly It rules out the possibility of 6 being
uppermost, so the two Outcomes, 1 and 6, are mutually inclusive, One result directly
affects the other.

In this case, the probability of throwing 1 or 6 with the first die is the sum of the two
probabilities, 1/6 + 1/6 = 1/3.

2. The probability of the second die being favorable is still 1/6 as the second die can
only be one specific number, a 6 if the first die is 1, and vice versa.

3. Therefore the probability of throwing 1 and 6 in any order with two dice is 1/3 x
1/6 = 1/18.” From the above citation, it can be seen that given a predefined set of
variables in the context of what will most likely occur in a given scenario (where all
potential external variables remain constant), a specific answer to the situation can be
assessed.

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Probability & their application in Business
Because of these limitations, probability theory in business is done according to past
variables and existing business situations and is not frequently used to predict earth-
shattering business decisions but rather is more limited in its scope, for it is not a
method of business assessment that is infallible.

It must be stressed that the existence of problems corresponding to the

overgeneralization of a specific scenario tends to create complications in certain
situations, where one article notes that:

“Probability theory and its offspring, inferential statistics, constitute perhaps the
most frustrating branch of human knowledge. The abstractness of formal methods
scares many people, and leads to frequent errors in the choice of procedures.”
(Simon & Bruce: 1993)

Indeed, the overwhelming use of probability theory is a useful tool only in scenarios
where generalizations are possible:

No one would build a space shuttle based upon the results of probability theory, but
one could theoretically predict ordering a preset number of products for a given
month based upon this method.

One source writes that: “Probability theory freed researchers from the drudgery of
repeated experiments. With a few assumptions, researchers could address a wide
range of topics. While the advances in statistics paved the way for elegant analysis,
the costs came high:

• We could analyze only certain types of statistics, such as the mean and standard
deviation.

• We had to make certain assumptions, like the normality assumption, about the
underlying distribution.

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Probability & their application in Business
• And researchers needed specialized training to apply, understand, and appreciate
statistics.”

Probability Theory in the Localized Department

Due to its limitations in a larger practice, probability theory is most applicable in

business within a smaller environment, such as that created by the individual sections
of a business.

What was made evident in the earlier discussion on probability theory is that this
method of analytical assessment also takes into account variations based upon chance,
where although the likelihood of a specific scenario can be compiled according to the
existing factors at hand; it can also be determined by those variables that do not exist.

This section shall demonstrate how both preset variables and chance figure into the
use of probability theory in an ordering division of a glassware business. Imagine that
Randolph Glassworks has a very exclusive china pattern on hand as its upper- end
model, and that the customers who order this pattern tend to do so most frequently in
pieces rather than ordering the set as a whole.

Because of this, the company therefore needs to maintain full sets because they need
to keep track of the parts that are most frequently ordered, and also to ensure that they

have full sets on hand if a client wishes to order the entire set. The company therefore
has decided to keep fifteen place settings of its most expensive china on hand
throughout the year in case it needs to fill any type of order.

Yet to maintain these fifteen complete settings, the ordering department also needs to
be aware of which pieces are the most likely to break and to ensure that these pieces
are constantly on hand in greater quantities.

In this scenario, the pieces that are most frequently ordered are dinner plates and
saucers for coffee cups: Using probability theory, the ordering department therefore

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Probability & their application in Business
needs to order more of these items than any other item to ensure that the company
constantly has fifteen complete sets of china on hand.

Probability Theory in the Business Environment

The least likely environment in business for a successful functionality of probability

theory is that of the business environment, for the limitations that exist in probability
theory makes this an unlikely tool for determining business moves for a company.

As this paper shall describe in a later section, other methods of analytical assessment
are more effective in this type of environment.

Probability Theory in the Respective Industry

The best- known use of probability theory in business is within the industry as a
whole: Specific industries such as insurance and car manufacturers rely heavily on
probability theory to help define the limits for policies and the design specifications
for automobiles.

Essentially, in the area of probability theory and business, the use of this analytical
method is done according to the likelihood of damage or injury versus the constant
state (life). This area of business can trace its roots back to the mid- eighteenth
century, where one source attributes probability theory in risk assessment to the study

of smallpox, where the mathematician D’Alembert attempted to determine the risk

assessment found within inoculation to smallpox.

This source notes: “One urgent social issue which prompted much argument about
probability […] was inoculation against smallpox. The procedure was not risk free. It
involved impregnating the skin with live smallpox pustules and could lead to death.

At the same time, however, over 10 percent of the populations of London and Paris
were being killed by the disease. “For D’Alembert the choice was approximately as

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Probability & their application in Business
follows: a 1 in 7 longer term chance of dying of smallpox versus a 1 in 200 short-
term chance of dying from the inoculation.

Complicating the issue was the generally small average life expectancy in Paris. In
addition, conservative opinion in France, including the Faculty of Medicine and the
Faculty of Theology at the University of Paris, had come out strongly against
inoculation.

“Daniel Bernoulli [another mathematician] applied his probability formulae for

lotteries to the problem of smallpox. He calculated the number of persons likely to be
killed by smallpox in a given time. Then, he calculated the gain in life expectancy
from inoculation for any given age. His formulas were necessarily rather crude and
the statistics of mortality inadequate, but his results definitely favored inoculation.”

This risk- versus- gain still exists in the modern business environment, where
companies that do business that contains a certain element of risk need to be aware of
the likelihood of injury to a customer, either independently (insurance) or as a result
of product use (car manufacturing).

The end result of this assessment helps to create the parameters around which the
business can be conducted with the maximum amount of profit according to the
minimum amount of inherent risk. To enumerate this concept further through a
quantitative method, the researcher uses the example of stocks of a company Genco.

Suppose a broker buy shares of Genco Corporation at a price of $100 per share and
intend to keep it on hold for one year for a dividend yield of 3%.

Total rate of return of the share can be estimated by the formula: Suppose the price of
the stock changes by 7% while its yield remains at 3% in one week, then the total
return is R= 3 + 7 % = 10%. Genco’s stock price may yield 10% or it may yield
differently but the yield will be around 10% in the short run.

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Probability & their application in Business
The change in Genco’s stock’s price is basically based on the volatility theory. For a
short term the probability of the returns is easy to gauge but in the long run, the
volatility rate is quite different.

It is based on a range of deviation or probability distribution range. For example if the

possibility of not gaining return is zero then the probability ratio of 10% return can be
assigned as one. To determine the long term return, the broker will estimate
probabilities of Genco’s stock in a weak, a strong and normal economy and obtains
the following figures:
State ofGenco Probability

Strong 30% 0.20

Normal 10% 0.60
Weak -10% 0.20

Using the above probability returns the broker can further calculate the expected
returns:

Expected Returns = Sum of (Probability of Return) x (Possible Return)

From the table ER = 0.20 X 30% + 0.6 x
10% +0.2 x -10% = 10%

Thus, the most likely return that a broker will gain is 10% for Genco’s stock. The
utility of probability theory can extended further if the broker decides to compare the
price of Genco’s stock and that of its competitors. The outcome will give him an idea
as to which stock is a better investment and which one poses a higher risk for returns.

Utility Theory

Far easier to understand than probability theory – and arguably the method of
quantitative assessment that is most frequently used in business – is that of utility
theory. This section shall define utility theory and how advances in technology have
created an environment in which this method of assessment is most effective in
predicting consumer responses.

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Probability & their application in Business
Introduction to Utility Theory

The functionality of utility theory is best found in measuring the preferences of an

individual or a target group of individuals and measuring the impact of these
preferences on behaviors and beliefs. This practice should sound familiar to any
student in business, for the study of utility theory is the study of consumer buying
behaviors.

In utility theory, the individual that is targeted for assessment is believed to be a

rational individual who determines his or her behaviors according to obvious needs or
desires. The scale against which these behaviors are measured is called a “utility”
scale, and the ranking placed upon this scale helps in the overall assessment of
behaviors.

The study of utility theory is by no means a new area, but it has become a science
over the past five decades. The earliest methods of utility theory in economic practice
can be traced to a mathematician who suggested that consumer behavior was
essentially predefined according to set patterns of behavior, and that these behaviors
could be slightly altered or exploited:

In his book The Theory of Value, author Debreu (1959) suggested that consumer
behaviors could be understood in the sense that these behaviors created an
“equilibrium” for consumers, where if someone needed a product they would seek out
that product.

Those seeking to encourage consumers to change their behaviors would not get them
to alter their need but could instead alter their desires. For example, if someone needs
drain cleaner, this need cannot be changed but their decision of which drain cleaner to
buy can be altered according to knowledge of the utility theory.

Utility Theory in the Localized Environment

The use of utility theory in specific sections of a specific business is not overly
functional: Utility theory helps predict behavior on a larger level, which in turn can
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Probability & their application in Business
impact the localized environment. However, there is very little direct interaction
between utility theory and the localized environment.

Utility Theory and the Business Environment

Utility theory in the business environment is one of the most widely- used assessment
tools for quantitative analysis. The purchasing behavior of consumers is what drives
businesses, and those businesses that fully understand their target consumer audience
and how to best appeal to them are far more likely to succeed than companies that do
not recognize this basic area of commerce.

Companies that wish to succeed have even gone so far as to utilize new methods of
technology to keep track of their consumers’ purchasing behaviors in order to better
tailor their businesses and therefore draw in greater consumer interest. Perhaps the
best example of this use of new technology is in the supermarket:

It is a common feature in supermarkets to find a type of membership discount, where

customers that are part of the supermarket’s community are offered discounted
savings when they run their membership card.

However, in addition to offering savings, the membership card also creates a tally of
the customer’s purchasing behaviors, including the type of product purchased and its
size, cost, and the time of month it was purchased.

The supermarket can therefore use these membership cards to either offer the
customer increased savings or provide incentive for the customer to return, or to
simply chart the types of buying behaviors displayed by their customers.

Utility Theory and the Respective Industries

Those familiar with business will recognize that entire industries have been compiled
around utility theory – Advertising is a multi- billion dollar industry that all

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Probability & their application in Business
companies tend to rely upon to some degree, and the use of advertising suggests that
all companies are aware of the need to assess consumer behaviors.

According to the use of utility theory and other methods of statistical assessment,
companies determine all manner of business strategies including releasing new
product lines, changing existing products, and adapting existing strategies to better fit
the demands of consumers.

Yet despite the traditional reliance on utility theory in industries such as advertising –
as well as the businesses that benefit from the use of utility theory – there are inherent
flaws within this type of method that cannot be overlooked.

One article from the renown industry digest Quirk’s Marketing Research Review
(Lawson & Glowa: 2000) suggests that there are four limitations in utility theory,
where this method is lacking in the following:

a. Forecasting demand for new, or category- revolutionizing products.

b. Forecasting demand for products in categories in which new and different attributes
which were not previously a consideration in choice are introduced.
c. Forecasting demand for products in categories in which attribute ranges are
stretched well beyond those in present markets.
d. Forecasting demand in markets in which serious multicollinearity is present among
the predictor variables.

Also, this source suggests that a wholesale reliance on advertising as a solution to all
problems in business is a flawed perspective, because utility theory is based upon the
belief that customers can be manipulated according to their choices made when
buying a product. The authors note that:

“Real customers who make choices in real markets frequently decide not to choose.
That is, for whatever reason, some customers choose to delay purchases or choose no
products offered in a particular category.
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Probability & their application in Business

Examples of the former customers include millions of potential customers for PCs
who know they eventually want to have one at home, but are waiting either for prices
to drop further, or functionality to increase, or both. Examples of the latter customers
include those who are allergic to chocolate, and hence, will not buy chocolate
products regardless of the category in which they are offered.

Reliance on advertising in an industry can therefore be concluded as a science, but

perhaps not the most exact science necessary to predict all aspects of consumer
behaviors.

This is apparently why markets constantly emerge that were either underestimated or
unpredicted, and markets that were seen as potential booms collapse without warning.

Game Theory

Unlike the assessment models of probability theory and utility theory, game theory is
best utilized according to human created conditions within a specific working
environment. Game theory is extremely diverse in its scope yet can be generalized as
how human beings or larger entities such as organizations interact within certain
conditions.

An Introduction to Game Theory

The study of game theory is the study of human behavior within a specific
environment. When applied to business, the use of game theory helps to determine
how an individual or a business will react within that environment.

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Probability & their application in Business
In terms of qualitative assessment, game theory is unique because it also brings into
play elements of human psychology that are not generally found within standard
assessment techniques, such as philosophy and altruism.

For example, one of the best- known elements of game theory is the “prisoner’s
dilemma”: Simply put, the matter of game theory in the “prisoner’s dilemma”
suggested that in a prison setting where two individuals were being questioned
separately and the one who talked first was (theoretically) offered freedom, either
both parties could benefit slightly, one party could benefit significantly, or both
parties could suffer severe losses.

The response of the other is dependent upon not only their own desires, but also upon
the questionable benefits that they might receive if they remain silent. This aspect of
game theory is summarized from an article published in the Journal of the History of
Economic Thought. Author Roth (1993) writes. “In January of 1950, Melvin Dresher
and Merrill Flood conducted at the Rand Corporation an experiment which has had an
enormous if indirect influence, since it introduced the game that has subsequently
come to be known as the Prisoner’s Dilemma.

The game they studied was the hundred- fold repetition of the matrix game given
below, between a fixed pair of subjects who communicated only their choices of row
(1 or 2) or column (1 or 2). (-1,2) (1/2, 1) (0, 1/2) (1, -1) Payoffs were in pennies, with
each player receiving the sum, over the one hundred plays of the game, of his payoffs
in each play.

The unique Nash equilibrium prediction is that the players should choose (2,1) - the
second row and the first column - at each of the hundred repetitions. Thus the

predicted earnings of the players are 0 for the row player (henceforth “Row”) and
$0.50 for the column player (henceforth “Column”).

Of course this is inefficient, since if the players instead played (1,2) at every period,
for example, their earnings would be $0.50 for Row and $1.00 for Column þ i.e. they
would both earn more.
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Probability & their application in Business

But this is not equilibrium behavior. That equilibrium play is substantially less
profitable than cooperative play made Dresher and Flood anticipate “correctly” that
this game would present a demanding test of the equilibrium predictions.

“The observed payoffs, for a pair of players […] were $0.40 for Row and $0.65 for
Column. This outcome is far from the equilibrium outcome, although it also falls
considerably short of perfect cooperation.

(This observation has since been replicated many times.) Dresher and Flood
interpreted this as evidence against the general hypothesis that players tend to choose
Nash equilibrium strategies, and in favor of the hypothesis that a cooperative “split
the difference” principle would be more powerful in organizing the data from games
of this kind.”

Yet in a business setting, the welfare of a single company is weighed against the
potential benefits or losses that might be incurred from interaction with another
company. Game theory is one way in which to best predict the outcome of encounters
between individuals and between organizations, as shall now be clarified:

Game Theory in the Localized Environment

Game theory in a localized environment is most often utilized as part of the team
building process, where members of a specific department are required to participate
in teaching tools that utilize game theory as a means of better understanding their role
in business. For example, in the aforementioned Randolph Glassworks there seems to

be a competition between two men in the design department for the attentions of their
manager.

The manager recognizes this competition as unhealthy only when one of the men
seeks to sabotage the other’s labor. Even after several meetings designed to solve the

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Probability & their application in Business
problem, the manager is able to tell that the problem persists and is afraid that it will
again erupt in a way that will harm the work of one of the men.

The manager determines that a day of team building is the best way to rectify this
situation and he determines that game theory is the best method of team building to be
used: Not only is the manager able to bring his department closer through interaction
but he can also take the results of the survey assessments provided to the department
and see if he can use the results to alleviate the pressure that exists between the two
men.

Game Theory in a Business Environment

The role of game theory in a business environment is remarkably like that found
within the localized environment, where the use of game theory can be done to
determine the interactions of various departments and individuals, and the results of
the testing can then be evaluated to see how team- building can be accomplished.

In addition, game theory is occasionally used on customers for a specific business to

evaluate how the customers perceive themselves within their relationship to the
business: Surveys and phone interviews are often used to facilitate this type of
quantitative assessment.
Game Theory in the Respective Industries

Game theory is so widely varied in terms of its use, its features, and its impact that it
is rare that an encounter between two businesses cannot be explored via a function of
game theory.

For example, imagine a situation where two businesses were planning to merge:
These businesses then need to assess their relationship to each other and the use of
game theory can help in predicting how one business will react to the merger. Game
theory can therefore serve as a means of understanding the position of the other entity
and will thereafter help encourage a facilitated relationship between the two.
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Probability & their application in Business

7. CASE STUDY
About enterprise Attock Petroleum limited, Ltd.
Attock Petroleum Limited (APL) is an associate company of the Attock Oil Group of
Companies, which is the only fully vertically integrated Group in the Oil & Gas sector
of Pakistan involved in Exploration & Production, Refining & Marketing. APL's
corporate head office is registered in Islamabad.

Groups of goods Attock Petroleum limited, Ltd.

Automobile oils, Automotive gear oils, Oils for automatic gearboxes, Oils for
automatic transmissions (automatic), Oils for automotive torque converters, Oils for
passenger automobiles, Oils for trucks and heavy machinery.

Attock Petroleum limited, Ltd. Address: 6, Faisal Avenue, F-7/1, Islamabad,

Pakistan http://1959.pk.all-biz.info

Applying Probability to Improve Business Performance Helping

Company to Look Forward

Today, enterprise software professionals continue to mull over what capabilities they
can add to their products both to create more value for their customers and to identify
unique differentiators that allow them to compete more effectively versus their
competition.

If The Graduate was recreated in the year 2009and the working professional had deep
experience in enterprise software applications to help improve business performance,
it is likely that the one word that would have a great future would be probability.

The application of probabilistic models to help address business problems is nothing

new, but the breadth of understanding of these models, and the ability for non-
mathematicians to apply them to help tune both financial and operational
performance, is coming of age.

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Probability & their application in Business
Professor James Smith of Duke University’s Fuqua School of Business says, “From
an academic perspective, predictive models have advanced both in terms of accuracy
and flexibility, and these technologies can now be applied to a wide variety of
business forecasting problems. It is clear that these technologies have the potential to
have a tremendous impact on day-to-day financial and operational decision making.”
 
Several performance management vendors have been touting the application of this
type of mathematics in their applications with varying degrees of success. In its
simplest form, predictive analytics provide a platform for a business user to help him
feed historical information and key business drivers into a financial model and use
that model to help define a range of future performance with a probabilistic degree of
certainty.

Although not the crystal ball that many execs would dream to have, this approach has
significant advantages over the traditional review of historic financials and applying x
% growth when considering future business forecasts and budgets.

On an operational level, companies are applying this type of analytics in both the
sales and marketing department, as well as with human resources. In the cellular
communications and credit industries, customer churn has always been a topic that
executives recognize as the driver for success.

The companies that could better identify potential customers who were considering
defecting to a competitor could have the opportunity to take steps to ward off that
defection. Several banks and cell phone carriers apply sophisticated models to help

identify early signals of waning customer satisfaction or cost sensitivity – and take
proactive steps to retain those clients.

Forward-thinking human resource departments are also using these predictive

capabilities to identify valuable employees who may be at risk. Assuming there is an
interest in retaining an “at risk” employee, managers can take proactive steps in terms

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Probability & their application in Business
of enhanced communications, compensation and/or promotion to help assure that the
employee stays focused on the job at hand.

In summary, predictive capabilities continue to evolve, and there are technologies

now available that do not require an advanced degree in mathematics to apply to
pressing business issues. For companies that are ready to proactively embrace this
next stage of performance management, they will likely find themselves with an
advantage over their competitors who rely on the more traditional approach to
financial and operational planning.

 The HR Manager of the company is responsible for market trend analysis,

services development and technology vendor relationships at the company, the
leading independent authority on business performance management (BPM)
solutions.
 Prior to BPM Partners, John was Senior Director, Product Marketing at
Hyperion Software, responsible for directing Hyperion's OLAP Business
Analysis financial software products.
 Earlier in his career, John was an end user of performance management
solutions while a product manager at Raychem Corporation, a Fortune 500
company that has since been acquired by TycoHR Manager has contributed to
many publications including the New York Times, BPM Magazine,
Information Week, Business Finance and eWeek, and he is a regular presenter
at performance management related conferences and web seminars.

8. CONCLUSION

This paper has investigated three specific forms of quantitative assessment theory in
respect to their functionality within the business environment.

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Probability & their application in Business
It can be concluded that businesses that wish to understand their own internal position
and their relationship to other companies within a larger scenario would strongly
benefit from the use of these and similar assessment tools, for these tools help to
create a better overall understanding of how and why events and relationships can be
predicted within businesses.

REFERENCES

 Aumann, R. J. & S. Hart. (1994) Handbook of Game Theory with Economic

Applications. Amsterdam: North- Holland.

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Probability & their application in Business
 Axelrod, R. (1984) The Evolution of Cooperation. New York: Basic Books.
Baird, D. G., Gertner R. H. & Picker, R. C. (1994) Game Theory and the Law.
Cambridge Mass.: Harvard University Press.

 Bandura, A. (1977) Social Learning Theory. Englewood Cliffs: Prentice-Hall.

Carroll, J. S. & Johnson, E. J. (1990) Decision Research: A Field Guide.
(Applied Social Research Methods Series: Volume 22).

 Joyce, J. M (1999) The Foundations of Causal Decision Theory. Cambridge

Studies in Probability, Induction, and Decision Theory. Cambridge:
Cambridge University Press.

 Lawson, S. & Glowa, T. (2000) “Discrete Choice Experiments and Traditional

Conjoint Analysis.” Quirk’s Marketing

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