Probability Theory is a mental model used in risk mitigation that helps in making calculated decisions in business by estimating the likelihood of potential outcomes.
Probability Theory refers to the mathematical framework used to analyze and calculate the probabilities of different outcomes occurring. It provides a rational means for making inferences or predictions about unknown events or processes. In a business context, this could be used to estimate the probabilities of various risks materializing, and base decisions on those calculations. For example, a car manufacturing company might use probability to calculate the likelihood of a major supplier going bankrupt, which could disrupt their supply chain. With this probability calculated, they could make calculated decisions about whether to diversify their suppliers.
The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us - Peter L. Bernstein
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