Online Learning

Business Statistics Decision of Uncertainty Paper

3

750

Running Header: Business Research and Decision Making Module: The decision to invest or not to invest in a certain security, bond or stock, is of particular importance in a business scenario. Investors are usually faced with the dilemma whether they should invest or divest a particular security. From my experience, I have found out that using probability theory is a very good means of assistance if investors use it properly. However, one must be extremely careful in selecting the right data. If the right data is not selected then the results obtained from computing that data will be nowhere near accurate and this will lead to wrong business decisions. All businesses thrive on right and accurate decision making of the managers and owners and wrong decision making has a cost. A wrong decision has financial implications. For example, I have always wanted to invest in the stock market. However, my parents were against this investment as they considered it quite risky and uncertain investment. They feared that I will lose my money if I invested in the New York Stock Market. However, I convinced them that I will be cautious and keep my risk appetite low. I also told them that I will use the theories that I have learned in Finance and Business course and combine it with actual data to arrive at which stocks to invest my money in. In the end, they allowed me to invest in the stock market. First of all, I studied the stock market. I found out that the chances of market collapsing are around 80%. This means that there is only a 20% chance that the market will do well. NYSE returns average 25% when the market is doing well. However, when the market is near crashing the market returns falls below 0%. In fact many people lose as much money as 5 times their initial investment. Hence, no matter how well the stock is doing, there are more chances of a failure than a success. Similarly, there is a big risk at stake when people invest in the stock market regardless of the health of the market. The probability theory will always give us negative results if we compute the data. For example, Return = 0.8 * -0.1 + 0.2 * 0.25 = -0.08 + 0.05 = -0.03 I calculated the stock market returns using the probability distribution mean theory. There are 80% chances of stock market collapsing and if the stock market collapses the return will be negative 10 percent (Munknee, 2011). Similarly, the chances of stock market booming are only 20% and if the stock market does well, the returns will be as high as 25%. The computation of data shows a negative 3% return on the money invested in stock market. This is clearly not a sound or safe investment as even the risk free investment in the USA is earning a return of 4.375% (Bloomberg, 2011). Hence I decided to refrain from stock market and started looking for other avenues where I could invest to earn a decent return on my investment. This is a very simple case depicting that investment in the NYSE stock market will always result in loss of investment and there are no two ways about it. The only thing that can happen is the loss of investment. No matter how less the risk appetite of the investor is or how safely he reads and plays the stock game, in the end he will always lose the investment. This data discouraged me from investing in the stock market and I realized that my parents are right. Stock market is not a game for the masses. It is the game for extremely rich people who can distort demand and supply of the market by pumping in money and leaking it out when they see it fit. This was a very good lesson that I learned. Had I invested in stock market and earned a meager return on my meager investment, I would have invested larger amounts in the stock market and this is where I would have lost a lot of money. Hence, business research and understanding of how to use statistics have helped me making more sound decisions rather than just trusting my instincts and using my intuitions for decision making which is a very bad thing to do and no business manager, owner or entrepreneur should do this.(Daft, 1994) References: Bloomberg. (2011). Returns on US Government Securities. Retrieved on 2 July 2011. Retrieved from: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/ Daft, Richard L. (1994). Management. The Dryden Publishing Munknee. (2011). NYSE Stock Market Collapse Chances. Retrieved on 1 July 2011. Retrieved from: http://www.munknee.com/2010/09/dreaded-hindenburg-omen-indicator-suggests- 77-likelihood-of-imminent-major-market-decline/

Business Statistics Decision of Uncertainty Paper