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QUANTITATIVE TECHNIQUES
(5564)
Executive MBA/MPA (Col)
RELEVANCY OF
PROBABILITY THEORY IN
DECISION MAKING
ZAHID NAZIR
Roll.No. AB523655
Semester:Autumn 2008
The uncertainty situations can be classified into two categories, first, those
situations where an experiment can be conducted repeatedly; secondly, those
situations where it is not possible to conduct the experiment either because the
cost is prohibitive or because it is physically impossible to conduct the
experiment. Managers base their decisions either on the basis of their past
experience (the repeated experiment) or on the basis of informed guess, a better
term for which will be the subjective probability.
DEFINITION OF PROBABILITY
The word probability refers to the chances of happening of an event. Thus when
we say that chances of winning an election are seventy per cent, we are in fact
saying that the probability of winning is 0.7. Let us now define the probability in a
Zahid Nazir – 1st Semester (MBA Col) Page 3
more rigorous way. We will define it under two approaches - the Classical
Approach and the Bayesian Approach.
For example, in tossing a coin, there are only two outcomes i.e. the head
up or tail up. Therefore in a single toss of a fair coin, the probability of
getting a head up is the same as the probability of getting a tail up and is
equal to 0.5. If we roll a six sided die, there are six possible outcomes
corresponding to the six sides of the die and each outcome is equally
likely. Thus the probability that the face with dots ‘i’ turns up will be
P(i)= 1/6 for all values of i, 1,2,3,4,5,6. So far we have discussed the
concept of probability of an outcome (simple event). We can use this
concept to define the probability of an event, where by an event we
mean a combination of simple events. Thus, the probability of an event
A is equal to the number of possible outcomes favorable to A divided by
the total number of possible outcomes of the experiment, assuming all
the outcomes as equally likely. For example, in a throw of a single die,
the event “odd number” can occur in three (favorable) ways i.e. 1,3 and
5 of the total six possible equally likely outcomes. Hence the probability
of getting an odd number is 3/6 or 0.5.
a). Find the probability of drawing “a dice” in a single draw from a well
shuffled deck of cards.
= 13/52 = 0.25
= 15/500 = 0.03
Thus the probability of ‘A’ is a unique number ‘p’ to which the outcome
ultimately settles down. The fraction m/n of the outcome is referred to
as the “relative frequency” of the event in ‘n’ trials. If 1000 tosses of a
coin result in 519 heads, the probability of head is
= 519/1000 = 0.519
If another 1000 tosses results in 496 heads, then the probability of head
is
Since the ‘m’ cannot take a negative value, and the extreme values it can
take is ‘0’ and ‘n’, the probability must lie between 0 and 1 i.e. 0 ≤ p ≤ 1.
Thus, the probability of an event is a number between 0 and 1. If the
event cannot occur, its probability is 0 and if its occurrence is certain its
probability is 1.
Managers quite often face problems that have never occurred in the
past and will never occur in the future in precisely the same form. Under
such circumstances, if the decision maker is making an attempt to
quantify the possibility of happening of an event, he is expressing his
opinion on the basis of his feelings about the situation and his “degree
of rational belief”. Such quantification in terms of a number between 0
and 1 is often referred to as personal or subjective probability.
Approach Context
Classical Approach The pattern of outcomes is countable.
Consider the simple example of tossing an unbiased coin twice. The sample
space can be represented as follows:
In studying the performance of industries, one can define the sample space
as follows:
all industries declaring the dividends during
When two or more events occur in connection with each other, their
simultaneous occurrence is called a compound event and the
probability that the two or more events will all occur is called the
“joint probability” of these events. The joint probability of two events
is denoted as P(AB).
A∩B
A B
P (A|B) = P (A)
P (B|A) = P (B)
The probability that at least one of the several mutually exclusive events A1,
A2, ………. An will occur is the sum of the probability of the occurrences of
the individual events. Thus
A = A1 U A2 U……… U An
ADDITION RULE
When finding the probability that event A occurs or event B occurs, find the
total number of ways A can occur and the number of ways B can occur, but
find the total in such a way that no outcome is counted more than once.
Definition
Events A and B are disjoint (or mutually exclusive) if they cannot occur at
the same time. (That is, disjoint events do not overlap.)
P(A) + P(Ā) = 1
P(Ā) = 1 – P(A)
P(A) = 1 – P(Ā)
MULTIPLICATION RULE
If the outcome of the first event A somehow affects the probability of the
second event B, it is important to adjust the probability of B to reflect the
occurrence of event A. The rule for finding P(A and B) is called the
multiplication rule.
P(A and B) = P(event A occurs in a first trial and event B occurs in a second trial)
Tree Diagrams
Conditional Probability
The probability for the second event B should take into account the fact
that the first event A has already occurred.
Note that if A and B are independent events, P(B|A) is really the same as
P(B).
When finding the probability that event A occurs in one trial and event B
occurs in the next trial, multiply the probability of event A by the
probability of event B, but be sure that the probability of event B takes into
account the previous occurrence of event A.
Note : This is only the overview of Risk Management System. Original documents
could not be part of assignment due to their confidentiality.
GlaxoSmithKline Pakistan Limited was created on January 1st 2002 through the
merger of SmithKline and French of Pakistan Limited, Beecham Pakistan (Private)
Limited and Glaxo Wellcome (Pakistan) Limited- standing today as the largest
pharmaceutical company in Pakistan.
GSK leads the industry in value, volume and prescription market shares. Company
proud of thier consistency and stability in sales, profits and growth. Some of their
key brands include Augmentin, Panadol, Seretide, Betnovate, Zantac and Calpol in
medicine and renowned consumer healthcare brands include Horlicks, Aquafresh,
Macleans and ENO.
In addition, companyis also deeply involved with our communities and undertake
various Corporate Social Responsibility initiatives including working with the
National Commission for Human Development (NCHD) for whom GSK was one of
the largest corporate donors. GSK consider it their responsibility to nurture the
environment we operate in and persevere to extend their support to our
community in every possible way. GSK participates in year round charitable
activities which include organizing medical camps, supporting welfare
organizations and donating to/sponsoring various developmental concerns and
hospitals. Furthermore, GSK maintains strong partnerships with non-government
organizations such as Concern for Children, which is also extremely involved in
the design, implementation and replication of models for the sustainable
development of children with specific emphasis on primary healthcare and
education.
Excited by the constant search for innovation, we at GSK undertake our quest
with the enthusiasm of entrepreneurs. We value performance achieved with
integrity. We will attain success as a world class global leader with each and
every one of our people contributing with passion and an unmatched sense of
urgency.
Following are the different steps involved in the risk management system:
Approval Approval
RISK SCORING
• Review the consequence of a risk first and only when this is agreed – review
the associated likelihood of the scored consequence.
• The key requirement for the risk management process is that the significant
risks are identified managed appropriately – the precise scoring is a
secondary consideration.
• It is essential that risks within a risk assessment area are consistently scored
and prioritised and a group view is required by the Quality management
Process to avoid personal bias in scoring.
• The scoring supports the prioritisation of risks but, even then, judgement is
required where several risks all have the same score and decisions are
required in terms of resource allocation.
• Risks should be assessed and scored from a GSK perspective. Hence, the
consequence and likelihood Matrix (Appendix i) has been changed, to
focus on the actions required by GSK with respect to the Regulators, rather
than focus on the impact of the Regulators detecting risks e.g.
observations.
• The timing of potential future audits relative to the risk being detected
will not impact the score.
Note: Likelihood does not relate to how often a process is conducted but how
often the risk associated with it is likely to occur.
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CONSEQUENCES
Almost certain
5 5 10 15 20 25
Likely
4 4 8 12 16 20
Possible
3 3 6 9 12 15
Unlikely
2 2 4 6 8 10
Rare
1 1 2 3 4 5
The outcome of the risk assessment process is a list of scored risks which can be
prioritised based on scoring allowing decisions to be made on where resource and effort
should be focused. There is a pre-determined Red, Amber, Green (RAG) analysis aligned to
the Consequence and Likelihood Matrix (see above Appendix) which can be used to give
initial guidance on banding of risks to support focus of activities i.e.
Red = >10
Amber 5 – 9
Green <5
5 -Whys
Brainstorming
Surveys
Interviews
FMEA (Failure Mode Effect Analysis)
SWOT (Strengths, Weaknesses, Opportunities & Threats) analysis
PEST (Political, Economic, Socio-Cultural, Technological) analysis
Kaisen (Continuous Improvement)
GEMBA (Go and See)
Affinity & Fishbone diagrams
Reality Trees (Undesirable Effects (UDEs) for complex root cause analysis
Process flowcharts
Potential Problem Analysis (Kepnor Tregoe)
Benchmarking
Mind maps
IPO
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