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Thread: Hypothetical example of using probability to control emotions in business

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    Smile Hypothetical example of using probability to control emotions in business

    Imagine a company where there are two principals. The first person is the founder and owner of the company. The second person is nearly a partner in the company in that he shares in all the profits, and he works in the business daily and has tons of interactions with all of the clients. One day the second person decides to leave the business and the split is not a friendly one. The first person owns the company, the contracts, and has relationships with all of the clients. The clients can switch companies if they choose but they'd have to cancel their contracts which are not that hard to do. When the second person leaves he makes it very well understood that he has a copy of the client database and he will be making a run at all of the customers. There are approximately 100 clients. All the clients pay different amounts each period. Probably, 10% of the customers account for about 35% of the overall revenues and the remaining 90% account for the bottom 65% of revenues. Finally, pretend that the financial budget at the existing company is such that there is very little room for error in terms of losing accounts so that the company is just barely profitable. So any losses to the existing company are also extremely painful.

    When the split happens both sides are now anxious, the the original founder is nervous about losing customers, and the person who left is now anxious about whether or not he will be able to grow fast enough to survive out on his own.

    How would you model the probabilities? How could both parties utilize probabilities in order to master their emotions? What probabilities should both parties have considered before they broke the partnership? How could the founder and the person who is leaving utilize probabilities to start making plans to find other revenue sources in case things don't work out as they plan? From both perspectives?

    When I started to analyze this problem, I started off by thinking that the empirical probabilities are that each account could either switch or stay. So that the number of outcomes are 2 and each customer could only chose one of them. So the empirical probabilities are 50%. Say the founder wants to understand how much he should start planning for say if he thought he might lose 8 accounts? Wouldn't that be 50%^8? So that if there are 100 accounts? The probability of 8 switches is 0.0039? Then would you average out the revenues per client (even though you know there is a skew in the top 10% of clients and those are probably the exact accounts that would be targeted by the other side) and would you multiply that by some probability figure to reach a probabilistic adjusted amount of losses?

    What if he knew the particular 8 accounts that would be targeted almost immediately by the other side and how much they pay him each month? But he did not know if the other side would be successful. Could he estimate how much probabilistic adjusted revenues he should target to begin booking new sales revenues from other sources to cover potential losses?

    Is there a proper time to start looking at your "gut" instincts as a subjective probability rather than using empirical probabilities? So let's say that the empirical probabilities are either that the customers can switch or stay and that is a 50% probability, but let's say in your gut you feel like the other side had an 80% chance of getting certain clients to flip?

    How do you change the mathematics as events unfold?

    I am trying to look at this business problem, it's setup, and it's real time dynamics the same way a bridge player would be looking at the game as the cards come out?

    Last edited by jwoods76; 04-16-2017 at 05:44 PM. Reason: need one more correction

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