Multinomial Concepts in Business, Essay Example

Multinomial concepts are used to model relationships between polytomous responses and those that are regressive in nature. These responses could either be ordered or unordered.

A lot of business organizations allocate substantial sums of resources to carry out various investment projects.  These investments are made from decisions that do not necessarily expect immediate payoffs, but they are meant to position the organizations in being in a better position to realize better returns in the future.  The returns can be realized in different stages whereby one successful project might lead to others that are also successful.

To help these organizations properly evaluate the projects they invest in, many business organizations have moved from using traditional approaches and adopted other methods that are more optimal. Multinomial concepts are increasingly being used by businesses to assist in forecasting future business growth based on the present decisions and analysis that are made. Multinomial models have been proved to be superior when it comes to decision making as compared to other models like the regression models.

Managers can use multinomial models to bundle together a number of possible outcomes into a single investment. The outcomes may ‘differ in terms of the time periods, the levels of uncertainty and may also be in the form of later options.  They are able to decisions that are discretionary and make investments in capital expenditures that highly uncertain. Furthermore, they are able to effectively allocate resources by putting in consideration the strategies that are flexible. For example, business managers can make use of sensitivity analysis to determine the level of uncertainty of a future investment.  Businesses that are involved in marketing make use of multinomial analysis to determine the importance of individual or group choice of products.  They can successfully use the models to understand marketing situations where the number of alternatives is more than the attributes.  Practitioners in the marketing field are more interested in statistics that show how groups will behave or prefer as opposed to individual, thus multinomial concepts which focus more on cross-sectional rather individual analysis comes into play.

In conclusion therefore, use of multinomial concepts in business is increasingly becoming encouraged because of the theoretical and empirical and superiority when compared to the regression approaches that had been commonly used. Multinomial approaches ensure that more accurate business analysis and decisions are implemented.

Reference

Dennis, H (1999). The multinomial, multi attribute logit model. Journal of marketing research, vol 4 123-40