data (Hull & White, 2003). The three principal ways in which probability distributions are used in business through the application of statistical analysis are as follows (Newcombe, 1998):
1. To describe events. Descriptive statistics describe the performance or activity of one group or class, without attempting to make generalizations about other groups or classes. The use of probability distributions in this context allows business managers to define and understand markets, as well as to define and understand operational functions of the business firm.
2. To infer causes of events or infer the nature of future events. Inferential statistics permit the findings with respect to one set of relationships to be extended to other relationships and to generalize findings and conclusions on the basis of statistical inference. Probability distributions are at the heart of inferential statistics. Thus, managers of business firms, by carefully selecting a randomized sample that is representative of a wider population, can make reliable and valid inferences concerning behaviors in the wider population.
3. To enhance the decision making process. Decision theory provides managers of business firms with knowledge about events and relationships that reduce the level of uncertainty in the data upon which decisions for a firm are based. Probability distributions underlying quantitative statistical procedures allow managers of business firms to assess the strengths of relationships in a data set at specified levels of probability. In this way, business managers specify the degree of uncertainty upon which they base decisions.
Hull, J., & White, A. (2003, Spring). Valuing credit default swap options. Journal of Derivatives, 10(3), 40-50.
Newcombe R. (1998). Interval estimation for the difference between independent proportions: Comparison of eleven methods. Statistics in Medicine, 17, 873-890.
ESSAY NO. 3: BUSINESS USES OF NOR...