How to make a business decision?

Almost everyone thinks that they can be a successful business man or woman. But, how many truly know how to make a business decision?
Did you know that in fact, there is reliable process to make every business decisions?
 
Daniel Bernoulli a great Dutch mathematician created the formula that haunts all business managers around the world, which is:
Expected value = Value of the Gain x Odds of the Gain
 

Example: Should I bet in the lottery?

Decision making process:

1^st prize: (prize vs. odds)
€15.000.000 x 1/116531800

+

2^nd prize: (prize vs. odds)

€310.751000 x 1/6473989

+

…

+

13st prize

€4 x 1/23

= Expected value of €0,71

If the lottery ticket costs €2, this means that the expected value is less than the cost, so you shouldn’t bet, unless it is just for your own fun and entertainment.

But, what about if the expected calculated value turns out to be greater than the entry cost? This means that I should always invest?

Not really. It depends of the opportunity cost of that investment.

Before you make your final decision you must also compare the expected values between your best investment options available which require that investment resource.

So, it looks easy… what’s the trick?

The issue is around the odds. Usually business man and woman cannot calculate the odds accurately, because sometimes they don’t have enough information available about the market preferences, competitors intentions and other relevant key points that can affect their odds, and then, their only option is to estimate their odds.

And estimating odds having only part of the required information it is very hard.

 

P.S. – This article was inspired on Dan Gilbert presentation “Why we make bad decisions”.