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Odd Man In

Don't go on luck: Know the odds.

As a professor of statistics at the University of Toronto, Jeffrey Rosenthal has delved deep into the mathematical sciences. He recently wrote Struck by Lightning: The Curious World of Probabilities, on how understanding reasoning and the random wonders of probability can help you make better decisions.

Entrepreneur: How can entrepreneurs use probability to make decisions?

Jeffrey Rosenthal: In the book, I mention a restaurateur using utility function to make decisions. How many staff should he hire for a Saturday night? If he only has one waiter and many customers, there's a negative utility, because customers will be unsatisfied. If he has too many workers, he has to pay for [overstaffing]. By giving each factor a numerical rating on how good or bad the result would be, and the likelihood it will occur, you can see the safest decision with the least negative outcome.

Entrepreneur: Using statistics and probability, what's the likelihood my company will get mentioned on the front page of USA Today?

Rosenthal: Let's say that, on average, each USA Today front page mentions one new company, not counting Microsoft, etc. In the next year, about 365 new companies will appear on the front page, out of about 7 million potential companies [reported by the Census Bureau]. This works out to one company out of every 18,881. To put this figure into context, this probability is about a thousand times more likely than winning a typical commercial lottery jackpot with a single ticket.

Entrepreneur: Is the likelihood of a natural disaster affecting my business high enough to warrant insuring it?

Rosenthal: On average, you're going to give more to insurance companies than you get out, but you'd employ utility functions here. If you have a lot of flexibility in your financing, it's better to "insure" yourself [with savings], because on average, you're going to save money. The rub is that if you suffer a loss so catastrophic that your whole future is affected, insurance is worth more than just pure money. In that case, it would help you more to buy it for peace of mind.

This story appears in the August 2006 issue of Entrepreneur. Subscribe »