Many businesses apply the understanding of uncertainty and probability in their business decision practices. Probability models can greatly help businesses in optimizing their policies and making safe decisions. Though complex, these probability methods can increase the profitability and success of a business.
The optimization of a business’s profit relies on how a business invests its resources. One important part of investing is knowing the risks involved with each type of investment. The only way a business can take these risks into account when making investment decisions is to use probability as a calculation method. After analyzing the probabilities of gain and loss associated with each investment decision, a business can apply probability models to calculate which investment or investment combinations yield the greatest expected profit.
Customer service may be physical customer service, such as bank window service, or virtual customer service, such as an Internet system. In either case, probability models can help a company in creating policy related to customer service. For such policies, the models of queuing theory are integral. These models allow companies to understand the efficiency related to their current system of customer service and make changes to optimize the system. If a company encounters problems with long lines or long online wait times, this may cause the company to lose customers. In this situation, queuing models become an important part of problem solving.
Although game theory is an important part of determining company strategy, game theory lacks the inclusion of uncertainty in its models. Such a deterministic model can't allow a company to truly optimize its strategy in terms of risk. Probability models such as Markov chains allow companies to design a set of strategies that not only account for risk but are self-altering in the face of new information regarding competing companies. In addition, Markov chains allow companies to mathematically analyze long-term strategies to find which ones yield the best results.
Product design, especially the design of complicated products such as computing devices, includes the design and arrangement of multiple components in a system. Reliability theory provides a probabilistic model that helps designers model their products in terms of the probability of failure or breakdown. This model allows for more efficient design and allows businesses to optimally draft warranties and return policies.
- “Operations Research for Business”; Roger Eck; 1976
- “The Statistical Method in Business”; Frederick Ekblad; 1962
Having obtained a Master of Science in psychology in East Asia, Damon Verial has been applying his knowledge to related topics since 2010. Having written professionally since 2001, he has been featured in financial publications such as SafeHaven and the McMillian Portfolio. He also runs a financial newsletter at Stock Barometer.