Decision Analysis for Management Judgment, 6th Edition

11Methods for eliciting probabilities

Introduction

At the end of the last chapter, we gave advice on how to approach probability estimation. This was based on recent research evidence that people prefer to think in terms of the relative frequencies with which events occur, rather than probabilities. Nevertheless, it may not always be possible to assess frequencies for an event when there are no past instances of that event or of similar events occurring. In fact, many of the future uncertainties facing managers concern unique, or relatively unique, events – such as the likely success of a new advertising campaign or a new product launch. A number of techniques have been developed to assist decision-makers with the task of making probability judgments, and in this chapter, we will examine some of the more widely used methods.

Before we begin the chapter, we would like to ask you a few questions that involve assessing probabilities.

Probability assessment

1. What single probability number, on a scale from 0.0 to 1.0, best equates to your understanding of the words ‘very probable’?
2. What single probability number equates to your understanding of the word ‘probable’?
3. What single probability number equates to your understanding of the word ‘possible’?
4. What is the probability, on a scale from 0.0 to 1.0, that it will be raining tomorrow, at precisely 12 noon, over the building that you are now in?
5. What is the probability, on a scale from 0.0 to 1.0, that it will be raining ...