Flip a Coin: The Role of Statistics in Business Decision-Making

Written by Anne Archbald Apr 20, 2011

People face countless choices every day, ranging from the mundane (What should I wear?) to the
significant (Which job offer will I accept?). However, one may also consider the process entering into
a decision that could cost a company millions of dollars. For executive decision-makers, the future of
a corporation, its employees, and its legacy may be at stake.
Probability and statistics play a significant role in such decisions. Probability is used in business to
both evaluate financial and decision-making risk and to improve business performance. Business
statistics is the science of making sound decisions in spite of uncertainty, and it may be applied to
fields ranging from econometrics and financial analysis to auditing and market research.
As Steve Bradt explains in an article for The Harvard University Gazette, [E]veryday decision
makers must compare the relative sizes of costs and benefits, as when a car buyer balances the cost of
a warranty against the cost of repairs.
The consumer doesnt know at the outset whether he or she will have to pay for expensive repairs
down the road, he stated. This is just one example of the risk that accompanies a given decision.
Statistical techniques play a significant role in business applications. Factors such as randomness,
sample size, and statistical inference are all critical to acquiring data that may be of use to decisionmakers. This data may be reported on topics such as customer satisfaction, financial ratios, and profit
and loss statementsinformation that would be useful to investors, industry analysts, and the
companies themselves. For example, potential investors may use statistical data to investigate
investment options. Companies can use the data to trace their development and performance, and they
may subsequently use such information to analyze their strengths and weaknesses, and develop a
strategy for improvement. Finally, industries may examine such performance trends on a larger scale
to yield information that might have a broader impact on the economy.
According to statistical consultant Ann Kalinowski, Ph.D., a table of profits may be used to yield
expected outcomes when certain events are true. One would look for a dominating actionone
where the choice of action is obvious, so you dont need to go through the calculations to decide
between it and the inadmissible events, Kalinowski stated.
In the absence of a dominating action, she says, The easiest way to make decisions is to calculate the
Expected Monetary Value (EMV) of each action, and then choose the action that gives the highest
expected profit. However, there is always uncertainty in decision-making events. It is necessary to
achieve a balance in probability analysis between formal mathematics and more informal factors.
Psychology and neuroscience, for instance, may shed light on the nature of such decisions. As quoted
in Steve Bradts article, Joshua D. Greene, an assistant professor of psychology at Harvard, stated,
Research in neuroeconomics has identified distinct brain structures responsible for tracking the
probability of various outcomes, the magnitude of various outcomes, and for integrating these two
kinds of information into a decision. Clearly, a wide range of factors often contributes to a decision
and the subsequent course of action.
The science and mathematics behind business decisions aim to analyze risk and enable a person to
make an informed decision when the stakes are high. For this reason, many business programs require

courses in statistics and probability, so that future decision-makers have training and experience as
they confront difficult choices.