Using probability to predict my sales amount

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Discussion Overview

The discussion revolves around using probability to estimate the impact of a 10% increase in insurance premiums on sales amounts. Participants explore the relationship between pricing, purchase probability, and expected premiums, while considering the assumptions involved in their calculations.

Discussion Character

  • Exploratory, Technical explanation, Debate/contested

Main Points Raised

  • One participant proposes calculating the probability of purchase at different price points based on historical data, suggesting that if 5000 out of 20,000 quotes result in sales at $500, the probability of purchase at that price is 25%.
  • Another participant compares the situation to betting on horses, implying that the decision-making process involves assessing probabilities.
  • A different viewpoint argues against the initial proposal, questioning whether the acceptance of a quote at one price point would affect the likelihood of acceptance at a lower price point, suggesting a conditional relationship in probabilities.
  • One participant highlights the distinction between gambling probabilities, which remain constant, and risk management probabilities, which may change conditionally.

Areas of Agreement / Disagreement

Participants express differing views on the nature of probability in this context, with some supporting the use of simple division for estimating purchase probabilities and others challenging the assumptions behind that approach. The discussion remains unresolved regarding the validity of the proposed methods.

Contextual Notes

Limitations include the assumption that price is the only factor influencing purchase decisions, as well as the potential conditionality of probabilities based on customer behavior.

semidevil
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Suppose I'm trying to answer the following question: How much more insurance premium will I get, by raising rates by 10%. for this exercise, I"m assuming price is the only factor, just to simplify things.

Lets say I give 20,000 quotes per month. Obviously, not all will purchase my policy because the price might be too high. Now, if I increase rates by 10%, I will probably have even less people purchase the policy. If all my quotes range between $500 to $1000, is it possible to do simple division and group my policyholders by the probability that they will purchase at the different price points? i,e if 5000 of my purchased policies are in the $500 price point, then I can say that the probability of purchasing a policy at $500 is 5000/20,000 (25%).

so I then sum up all the expected values (probability * price point) to get an estimate of how much premiums I will get from this rate increase?
 
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The question is similar to asking; 'If I bet on THIS horse, does that make it more likely to win than if place my bet on THAT horse".
 
semidevil said:
is it possible to do simple division and group my policyholders by the probability that they will purchase at the different price points? i,e if 5000 of my purchased policies are in the $500 price point, then I can say that the probability of purchasing a policy at $500 is 5000/20,000 (25%).

I'd say no.

If a person did accept a quote at $500, wouldn't they also be likely to accept a quote at $400 if you had made such an offer ?
 
Hey semidevil.

You are asking a question based on whether something is conditional or not (in probability).

If you gamble the probabilities don't change.

If you risk manage - they do in a conditional capacity.
 

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