Objective Probability
Candlefocus EditorObjective probabilities are calculated by looking at the frequency of similar events that have happened in the past. Data is collected and analyzed to create a mathematical equation that will predict the probability of a similar event happening again in the future. This type of probability model relies heavily on its data – the more data it has to analyze, the more accurately it can predict a probable outcome.
Objective probabilities are commonly used in finance as a tool for making smart decisions. They help investors and financial managers to quantify their risk and better understand the potential return on their investments. For example, if the recorded data shows that a certain stock has a 50% chance of going up 10% in value over the next twelve months, a financial manager can use this information to make an informed decision about whether or not to purchase the stock.
Objective probabilities should also be used by businesses when making decisions related to potential expansion, cost structure, hiring, and marketing. By creating a data-driven system, businesses are able to make decisions based on sound scientific analysis instead of being swayed by gut feeling or opinion.
Objective probability, when applied properly, is an excellent way to make decisions based on facts and data. In contrast to subjective probability, which relies on personal experience and opinion, it gives investors, financial managers, and business owners the ability to make decisions grounded in scientific knowledge.