The employees of a leading mail-order computer software company are secretly thinking of breaking…

The employees of a leading mail-order
computer software company are secretly thinking of breaking away to form their
own rival company. This would require an investment of $3 million and the employees
will make the decision largely on the basis of the net present value of this
investment. To help them with their decision a risk analysis model has been
formulated. Development of the model involved estimating a large number of
probabilities including those set out below:

(a) probability distributions for the size
of the market (measured in total turnover) for each of the next five years –
»

The employees of a leading mail-order
computer software company are secretly thinking of breaking away to form their
own rival company. This would require an investment of $3 million and the employees
will make the decision largely on the basis of the net present value of this
investment. To help them with their decision a risk analysis model has been
formulated. Development of the model involved estimating a large number of
probabilities including those set out below:

(a) probability distributions for the size
of the market (measured in total turnover) for each of the next five years –
following the recent launch of a major new international software product, the
employees have experienced a buoyant market over the last few months;

(b) probability distributions of the market
share that could be obtained by the new company in each of the next five years
– these distributions were obtained by first estimating a most likely value and
then determining optimistic and pessimistic values;

(c) the probability that magazine
advertising costs would increase over the next five years – this was considered
to be less likely than an increase in advertising costs resulting from
increased costs of paper and an associated fall in the number of computer
magazines. Discuss the heuristics which the employees might have employed to
estimate these probabilities and any biases which might have emanated from the
use of these heuristics.

»

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