Objective Probability (Risk) - Explained
What is Objective Probability?
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What is Objective Probability?
Objective probability refers to the probability that analyzes if an event will take place. In this analysis, every measure revolves around an observation that has already been recorded or is based on historical data. As compared to subjective probability, objective probabilities are considered to be a more reliable measure of knowing the probability of a specific outcome. This type of probability observes historical data and utilize mathematical equations that utilize information for knowing the probability of the occurrence of an independent event. An independent event refers to an event whose outcome cannot be affected by any previous events. On the other hand, subjective probability uses data analysis technique, but is more affected by ones intuition or prediction about an event and the probable outcome. Key Facts:
- Objective probability is the type of probability that ascertains the occurrence of an event on the basis of already present information or observation or large portion of accumulated data.
- Subjective probability permits the analyst to calculate the probability of an outcome based on experience and their own judgement.
- In the financial world, people consider relying on objective probabilities for taking decisions rather than considering subjective stories, own experience, estimates, etc
Back To: INSURANCE & RISK MANAGEMENT.
How is Objective Probability Used?
Objective probability lets the observer analyze past data so as to know about the probability of a specific outcome, whereas subjective probability lets the analysts gain information and take decisions based on their personal experience. Objective probability deals with solid proof that can be a result of experiments, mathematical techniques, and statistics, and not own experience, estimates, stories, etc. Practically, the role of objective probability is significant as it doesn't consider taking emotional decisions at the time of making investment. People prefer going with rules of thumb or hunches in order to prove why a specific investment makes sense. However, objective probability breathes in fresh air and makes you get over the non-sensible decisions you make being emotional.
Example of Objective Probability
A person could assess the objective probability of a coin landing on the heads by flipping it 100 number of times and noting down every single observation. This would result in an observation stating that it was heads almost half or 50% of the time when the coin landed. On the contrary, an individual who is well aware of the weather patterns ascertains factors including wind shear, barometric pressure, and temperature of the ocean in order to ascertain the probability of a hurricane heading in a specific direction. For performing a statistical observation, every observation needs to be an independent event that cannot be manipulated or misused. If the observation is free from any bias, the final probability will be less biased as well.
- What is insurance?
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