What Is Objective Probability?
Let me explain to you what objective probability really means. It's the chances or odds that an event will happen, based purely on analyzing concrete measures rather than any hunches or guesswork. Each of these measures comes from recorded observations, hard facts, or a long history of collected data. You compute this probability using mathematical equations that process the data to figure out the likelihood of an independent event occurring—one where the outcome isn't affected by what happened before. On the flip side, subjective probability might use some data analysis but also throws in guesstimates or intuition to decide the chances of a specific outcome.
Objective vs. Subjective Probability
When you compare the two, objective probabilities give you a more accurate way to determine the probability of an outcome than subjective ones. That's because subjective probability leans heavily on human judgment and personal experiences. With objective probability, you as the observer can draw insights from historical data and then assess the likelihood of that outcome. Subjective probability lets you reference what you've learned and your own experiences to gain insight. Instead of being based only on hard data and facts, it's mostly about a person's estimate or intuition regarding a situation and its likely result.
Objective probability relies on empirical evidence from statistics, experiments, and mathematical measurements, steering clear of anecdotes, personal experiences, educated guesses, or hunches. In the financial world, you should prioritize objective probability to avoid making emotional decisions when investing. Individual investors often fall back on hunches, rules of thumb, or old wives' tales to justify their choices, which rely too much on subjective matters and emotions. Objective probability strips away those emotional and anecdotal elements when evaluating outcomes.
Key Takeaways
- Objective probability is the probability an event will occur based on an analysis where each measure comes from a recorded observation or a long history of collected data.
- In contrast, subjective probability allows the observer to gain insight by referencing things they've learned and their own experience.
- In finance, people ought to use objective probabilities to make decisions instead of relying on subjective stories, personal experience, or anecdotal evidence.
Examples of Objective Probability
Here's a straightforward example: you could determine the objective probability that a coin will land 'heads' up by flipping it 100 times and recording each result. This would probably show the coin landing on 'heads' about 50% of the time, which is a pure case of objective probability.
Subjective probability varies from person to person—objective probability does not. For instance, take a person educated about weather patterns who looks at barometric pressure, wind shear, and ocean temperature, then predicts the path of a hurricane based on their previous experience. While the data helps, the final prediction relies on guesstimated probabilities from the forecaster.
Why Objective Probability Matters
When you're judging probabilities or doing any statistical analysis, make sure each observation is an independent event not subject to manipulation. The less biased each observation, the less biased your final probability will be. That's why many people, including me when I think about it, prefer objective over subjective probabilities—it leaves less room for emotions or biases to creep in, as numbers, hard facts, and models take the place of guesswork, hunches, and intuition.
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