A mining company listed on the Toronto Stock Exchange is considering a merger with another company. The CEO thinks that the probability of the deal being acceptable to his shareholders is 0.9. He has lunch with the CEO of the other company and afterward assesses the probability of the merger being acceptable to the other company’s shareholders as 0.8. A stockbroker hears of this possible deal and finds that 78% of similar deals have been acceptable to both groups of shareholders in the past.

a) What methods of probability assessment have been used by (i) the CEO and (ii) the stockbroker?

b) Using the CEO’s estimates and making an assumption about the two groups of shareholders, estimate the probability that the deal will be acceptable to both groups of shareholders. Comment on whether your assumption is likely to be valid.