Probability: The Language of Uncertainty

11 Pages Posted: 23 Jun 2009

See all articles by Sherwood C. Frey

Sherwood C. Frey

University of Virginia - Darden School of Business

Abstract

This note serves as an introduction to probability distribution—their interpretation and their assessment. Uniform and triangular distributions, as well as discrete distributions, are discussed. Summary measures are presented. The discussion is framed in the context of an appraisal of a proposed product enhancement.

Excerpt

UVA-QA-0529

Rev. Mar. 14, 2017

PROBABILITY: THE LANGUAGE OF UNCERTAINTY

The considered appraisal of an alternative is not limited to a single estimate of the alternative's potential performance, but acknowledges explicitly the uncertainties that affect that performance. By considering the spectrum of possibilities to which an alternative's performance may be subjected, the risks involved in pursuing the alternative can be better understood. As a result, the search for new alternatives that reduce those risks may be motivated. In addition to acknowledging the range of potential outcomes, there is a need to acknowledge the likelihood of the possibilities within that range. This will help avoid an overreaction to the extremes of an optimistic/pessimistic analysis and will prompt new alternatives that respond to the likely outcomes as well as to the extremes.

This note will develop a language for describing and communicating the spectrum of potential possibilities and provide a tool for assessing the overall impact of those possibilities on performance. The language for describing uncertainty will be the language of probability and will apply both to uncertainties for which there are a few possible outcomes and to uncertainties for which outcomes may be anywhere within a continuous range. The tool for assessing the overall impact of uncertainty on performance will derive a probabilistic assessment of the performance of an alternative as a result of the probabilistic assessments of the underlying drivers of that performance.

The following example will be used to develop and illustrate the language, tools, and techniques of the note:

. . .

Keywords: probability, risk profile, summary measures, assessment, distribution

Suggested Citation

Frey, Sherwood C., Probability: The Language of Uncertainty. Darden Case No. UVA-QA-0529. Available at SSRN: https://ssrn.com/abstract=1422953

Sherwood C. Frey (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/faculty/frey.htm

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