14.1 Assessing Risk

Gregg, a promoter, is considering whether to schedule an outdoor concert on July 4th. Booking the concert is a gamble: He stands to make a tidy profit if the weather is good, but he’ll lose a substantial amount if it rains.

To analyze this decision Gregg needs a way to describe and quantify risk. A particular event—such as holding an outdoor concert—has a number of possible ­outcomes—here, either it rains or it does not rain. When deciding whether to schedule the concert, Gregg quantifies how risky each outcome is using a probability and then uses these probabilities to determine what he can expect to earn.


A probability is a number between 0 and 1 that indicates the likelihood that a particular outcome will occur. ...

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