Thursday, October 30, 2014


Importance of knowing the odds

 


While scientific study of probability is relatively new development, dating from 16th century, and mathematicians such as Cardano, Huygens and Pascal were the first to develop mathematics of probability as science of knowing “what are the odds” of specific event happening. To be able to estimate likelihood of an even that could hurt us or benefit us is vital mechanism to our development and survival as species. When father throws baby in air, he does it because he can (being physically stronger than the mother) and because it is fun for child. But, on a deeper level this is one of the earliest lessons given by the parent of the concept of the risk and reward which is vital skill for child to master in order to shift the odds in its favor and to make right decisions and choices as it grows and lives. Instead of living by the Nike's "just do it" slogan - this lesson is first step in learning what is likely to happen - if i do it, and therefore should i do it?

  
Probability measure is so central to our well-being as individuals or corporations because it answers the question of how likely an event will occur, and yet most of us do it rather instinctively, and not as part of plan, method or strategy. Once we figured likelihood of occurrence we can then decide appropriate next steps that are aligned with odds of an event happening. If chances are high of thunderstorm in specific area – we may change our plan to go there camping. If chances are high that someone will not respond to our marketing message we may not send expensive marketing offer to that customer.  
 
 
So, whether is in everyday life or in business – having some means of quantifying probabilities is hugely important tool of navigating through life. Good news is - we all have such means! In fact we are born with it - it is called human brain! We have in-born powerful data mining software that we (should) constantly work on improving – and so when we approach specific situation that may be significant for our physical, emotional well-being or for our pockets – we ask ourselves “has something similar occurred before and what was the outcome?” This then tells us whether to proceed or to retreat.
 
We spend our lives analyzing and comparing and then we make decisions. So, when we see word “analytics” on billboard – it wrongly implies that analytical technologies are only used by big companies only for commercial reasons. Not at all! We all do it - all the time! And the human brain is a super powerful computer with intuition, creativity, and with some serious massively processing power with over 250 000 neurons acting simultaneously in order to make decision, produce thought, or assign the odds of something happening. However, it has one limitation which is in the sheer number processing. If we have only 10 variables with each have 10 different values – there are near 10 billion potential combinations – and that is when we rely on computer software and its algorithms to do speedy number crunching for us, tells us some probability of something happening that we may benefit from or be in some situation that we want to avoid.
 
So, we all need to have at our disposal some analytical capacities and if we move this to levels of organizations (profit or non-profit) - it becomes utmost necessity to have some computerized analytical software. If only all underlying conditions in deterministic universe are known – there would be no probabilities and there would be a certainty of specific outcome! Can we ever come close to fully  knowing underlying conditions and causes and their values to absolute certainty of anything but the most simplest events around us? Not a chance, this has zero probability! And that is why we need so much probabilistic knowledge. That is not to say that everything is predictable, and in areas of science that stipulate in-determinacy such as in quantum or chaos theories and therefore probabilistic theories may not be equally applicable. Things get slightly more complex or simpler (depends how one looks at it) if we slightly change our scale of required “determinism” and we decide – well, I am not even interested about modeling cause and effect, instead i want to know associations, loose connections, linkages, patterns and correlations or anything else that would incrementally and cumulatively increase odds of knowing what will happen in period of time - based on how similar scenario played out before.
 
Fundamental question is “would you play if you knew the odds”? That question is applicable in all spheres of life. However, this is like asking – do we need air to breath? However, not everyone recognize importance of being able to answer that type of question, purpose of it and value it can generate? It is somewhat easier to see the value in colorful report even if presents trivial and non-actionable insight rather than simple number that says that the probability of our top customers switching to competitor is high. But those who do see value, will have brighter colours to paint their reports from.
 
Goran Dragosavac

3 comments:

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