Probability is a concept that tries to explain the relative possibility of the occurrence of an event. It is expressed as a fraction or a ratio of actual occurrences to the total number of occurrences. It can be calculated using experimentation or with the help of theoretical concepts. Probability is an aspect applied successfully by both scholars and theorists over the years. Probability concepts simply refer to the statistical approaches used by the business managers and owners in decision making.
In any business field, mathematical formulas or models are applied in determining the probability of a new opportunity to either succeed or fail. Probability concepts are categorized into empirical, theoretical or subjective types. These concepts are applied in decision making, where the situation is too complex to understand or solve. A good example of such a dilemma is whether or not to own production or leverage it to the third parties. Such a dilemma is faced by many managers in most industries (Mittelhammer, 2009).
Empirical probability is also known as relative frequency or experimental probability (Mittelhammer, 2009). It focuses on the long-run frequencies and on performing a number of trials and observing the outcomes. Theoretical probability is traditionally known as classical or priori probability by some authors (Berenson & David, 2010). Therefore, probability is based on the physics of the experiment without performing the experiment. It is presented as a ratio of the number of favorable outcomes to the total number of all possible outcomes. Subjective probability, on the other hand, is based on the intuition and personal confidence. It is also known as an educated guess or the process of making logically consistent decisions.
Decision on production is one that would require a concise and immediate action. A manager may not have time to conduct an experiment. However, a strong evidence would be needed in this case, and theoretical approaches may be not applied. Intuition and personal confidence are not particularly reliable methods and cannot be used in this case. Empirical approaches seem to be the most effective ways of making a decision in this case. The manager can collect data on the same in order to make an informed decision (Berenson & David, 2010). For the manager, the main aim is to reduce financing, which will attract high interests if he was to leverage production to the third party.
If a manager owns production, he will be able to maximize the profits, but it might take long to obtain financing. If he leverages production to a third party, he will have immediate financing, but he will also have a large debt to pay. This will interfere with the profits not to mention endangering the business assets in case of failure to pay the loan. The manager can collect information on companies that have applied the same method in dealing with production issues. Statistical data will yield a ratio of an outcome occurring to the total possible outcomes. He can then use a statistical data collected to make a correct decision. Uncertainty in this case is reduced to a considerable extent, having studied the extent of success in the other companies.
Subjective methods are usually not efficient as there is no evidence on the decision that is made. This method is advised for people with a lot of experience in their fields of expertise. Theoretical methods are accurate to some extent as logic and previously gained knowledge is used in decision making (Berenson & David, 2010). Empirical methods are known to be the most effective probability methods as evidence is required before making decisions. The most successful method would be applied based on the evidence collected.