loren Eric Swanson: Calculating Probability of Success

Tuesday, March 28, 2006

Calculating Probability of Success

Another little gem that you may find useful in calculating probability of the success of a venture comes from April 2006, HBR. Although it pertains to supply chains there is insight for all of us.

Suppose four suppliers meet to discuss the attractiveness of a potential collaboration. All of them commit to assigning their best resources to their respective initiatives, and all believe that the likelihood of delivering their part of the solution within one year is very high-90%. Assume that these individual estimates are accurate. How confident should the four suppliers be in the joint venture?

The unfortuanate nature of probability is that the probability of and event taking place is equal to the product (not the average) of the underlying probabilities. While each supplier has a nine-in-ten chance of succeeding, the chance that they will all have succeeded at the end of the year is significantly lower. In this case, it is 0.9 x 0.9 x 0.9 x0.9, which is 66%.


At Wednesday, March 29, 2006 10:22:00 AM, Blogger Andy McCullough said...

Sounds like the bar scene in A Beautiful Mind.


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