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272 Biases in probability assessment
(e) A company doctor estimating the degree of association between
the exposure/non-exposure of workers to a chemical pollutant
and the incidence of a particular respiratory illness among
these workers.
(f) The manager of a manufacturing company estimating the relative
probability of (i) a strike at the company’s Pittsburgh plant in the
next year and (ii) the company experiencing a long-term loss of
market share following a strike over pay at its Pittsburgh plant
in the next year.
(2) The employees of a leading mail-order computer software company
are secretly thinking of breaking away to form their own rival
company. This would require an investment of $3 million and the
employees will make the decision largely on the basis of the net
present value of this investment. To help them with their decision a
risk analysis model has been formulated. Development of the model
involved estimating a large number of probabilities including those
set out below:
(a) probability distributions for the size of the market (measured
in total turnover) for each of the next five years – following the
recent launch of a major new international software product,
the employees have experienced a buoyant market over the last
few months;
(b) probability distributions of the market share that could be
obtained by the new company in each of the next five years – these
distributions were obtained by first estimating a most likely
value and then determining optimistic and pessimistic values;
(c) the probability that magazine advertising costs would increase
over the next five years – this was considered to be less likely
than an increase in advertising costs resulting from increased
costs of paper and an associated fall in the number of computer
magazines.
Discuss the heuristics which the employees might have employed
to estimate these probabilities and any biases which might have
emanated from the use of these heuristics.
(3) A chemical plant is due for a major overhaul and the manager
has to make an assessment of a number of uncertainties associated
with the project. These include the time the overhaul will take
to complete (after 35 days the losses of production caused by the
overhaul could have serious consequences for the company) and the
risks that there will be leakage of dangerous chemicals into local
watercourses during the cleaning process. The following extracts