How subjective probabilities can be set for helping the decision maker to take the correct decision

Abstract

It is important in many areas of management to provide a measure of uncertainty. The only effective way to measure uncertainty is to use a numeric measure such as probability. The phrases used by some managers such as possible, doubtful, etc., are of little value as they mean different levels of uncertainty to different people. Probabilities being numeric in nature can be used to extend the knowledge of the situation by using the various rules of probabilities including the more complex such as Bayes's Theorem. When theoretical models are not available, probabilities can be assessed subjectively. An assessment of probability reflects an individual's state of information about a given quantity or event. The personal interpretation of probability is the corestone of the decision analysis philosophy. This paper presents the philosophy and practice used in probability encoding.