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Approaches to probability 75
The subjective approach
Most of the decision problems which we will consider in this book will
require us to estimate the probability of unique events occurring (i.e.
events which only occur once). For example, if a company needs to
estimate the probability that a new product will be successful or that
a new state-of-the-art machine will perform reliably, then, because of
the uniqueness of the situation, the past data required by the relative
frequency approach will not be available. The company may have
access to data relating to the success or otherwise of earlier products
or machines, but it is unlikely that the conditions that applied in these
past situations will be directly relevant to the current problem. In these
circumstances the probability can be estimated by using the subjective
approach. A subjective probability is an expression of an individual’s
degree of belief that a particular event will occur. Thus a sales manager
may say: ‘I estimate that there is a 0.75 probability that the sales of
our new product will exceed $2 million next year.’ Of course, such a
statement may be influenced by past data or any other information
which the manager considers to be relevant, but it is ultimately a
personal judgment, and as such it is likely that individuals will differ
in the estimates they put forward even if they have access to the same
information.
Many people are skeptical about subjective probabilities and yet we
make similar sorts of judgments all the time. If you decide to risk not
insuring the contents of your house this year then you must have made
some assessment of the chances of the contents remaining safe over the
next 12 months. Similarly, if you decide to invest on the stock market,
purchase a new car or move to a new house you must have spent
some time weighing up the chances that things will go wrong or go
well. In organizations, decisions relating to the appointment of new
staff, launching an advertising campaign or changing to a new computer
system will require some evaluation of the uncertainties involved. As we
argued in the Introduction, by representing this judgment numerically
rather than verbally a much less vague assessment is achieved. The
resulting statement can be precisely communicated to others and, as we
shall see in Chapter 12, it enables an individual’s views to be challenged
and explored.
Some people may be concerned that subjective probability estimates
are likely to be of poor quality. Much research has been carried out by
psychologists to find out how good people are at making these sorts of
judgments. We will review this research in Chapter 9 while in Chapter 10