Business Statistics For Dummies, 2nd Edition

Chapter 8

The Binomial and Poisson Distributions

IN THIS CHAPTER

Finding probabilities when only two things can happen with the binomial distribution

Using the Poisson distribution to calculate the probability of events occurring during a given time frame

You can model many complex business problems by using probability distributions. These distributions help provide answers to questions such as, “What’s the likelihood that oil prices will rise during the coming year?” “What’s the probability of a stock market crash next month?” “How likely is it that a corporation’s earnings will fall below expectations this year?”

A probability distribution defines the statistical properties of a variable. Accurate modeling of financial variables requires that you pick the appropriate distribution for a given situation. Two of the more widely used probability distributions in business are the binomial and Poisson distributions. These are examples of discrete distributions, in which only a countable number of values are possible.

This chapter covers the key properties of the binomial and Poisson distributions and explains the circumstances under which you may apply them. For each distribution, I give you formulas for computing probabilities and also provide tables as alternatives to doing the ...