In what business situations would confidence interval affect

In what business situations would confidence interval affect strategic decision making?

Solution

The business decision making process has some unique characteristics that need to be considered. It\'s not always simply a rational process where you define the objective, gather information, create a list of alternatives, make a choice and implement and evaluate the decision.

The size of the business, the mission and values, the availability of such things as expertise, finance and technology, the economic climate, the competition and the number of people affected may be very important factors.

In statistics, a confidence interval gives the percentage probability that an estimated range of possible values in fact includes the actual value being estimated. For example, a business might estimate that a machine uses 10 lbs. of plastic for each unit of a product created. Because the machine cannot be expected to use precisely 10 lbs. per unit, a confidence interval can be created to give a range of possibilities. The company might predict that there is a 95 percent chance that the machine uses on average between 9.85 and 10.5 lbs. of plastic per unit. The confidence interval in this example is 95 percent, and the likelihood that the actual amount of plastic used is outside the estimated range is 5 percent.

The key to objective decision-making lies in confidence intervals. They use the central limit theorem to quantify how much confidence you can place in any of your measurements or statistical conclusions from samples.

The measurement confidence we talk about here doesn’t address the capability of your system for acquiring measurements. Instead,measurement confidence assumes you have a perfect, ideal system for acquiring your measurements. This scenario should serve as another reminder of how important validating the capability of your measurement system is.