The business you started last year as only $5000 left in capital. A week from now you need to repay a $10,000 loan or you will go bankrupt. You see two possible ways to raise the money you need.
You can ask a large company to invest the $10,000, wooing them with the $5000 you have left. You guess your probability of success is 0.20. Or you could ask, in sequence, several small companies to each invest $2000, spending $1000 on each to woo them. You guess your probability of success is 0.20 for each appeal. What’s the probability you will raise enough money to repay the loan, with each strategy? Which is the better strategy, to be bold with one large bet or to be cautious and use several smaller bets? With the bold strategy, the probability of success is simply 0.20. With the cautious strategy, we need to use simulation to find the probability of success.
a. Simulate the cautious strategy 10 times using the Random Numbers applet on the text CD or other software. Show the steps of the simulations and specify any assumptions.
b. Combining simulation results for all students in the class, estimate the probability of the cautious strategy being successful.
c. Which strategy would you choose? The bolder strategy or the cautious strategy? Explain.