Prior Probability

DEFINITION of 'Prior Probability'

The probability that an event will reflect established beliefs about the event before the arrival of new evidence or information. Prior probabilities are the original probabilities of an outcome, which be will updated with new information to create posterior probabilities.

BREAKING DOWN 'Prior Probability'

Prior probabilities represent what we originally believed before new evidence is uncovered. New information is used to produce updated probabilities and is a more accurate measure of a potential outcome. For example, three acres of land have the labels A, B and C. One acre has reserves of oil below its surface, while the other two do not. The probability of oil being on acre C is one third, or 0.333. A drilling test is conducted on acre B, and the results indicate that no oil is present at the location. Since acres A and C are the only candidates for oil reserves, the prior probability of 0.333 becomes 0.5, as each acre has one out of two chances.

RELATED TERMS
  1. Posterior Probability

    The revised probability of an event occurring after taking into ...
  2. Recovery Property

    A specific class of depreciable real estate. Recovery property ...
  3. Compound Probability

    A mathematical term relating to the likeliness of two independent ...
  4. Objective Probability

    The probability that an event will occur based an analysis in ...
  5. Addition Rule For Probabilities

    A statistical property that states the probability of one and/or ...
  6. A Priori Probability

    Probability calculated by logically examining existing information. ...
Related Articles
  1. Markets

    Guide To Oil And Gas Plays In North America: Eagle Ford

    The Eagle Ford may be the greatest oil discovery in the U.S., and maybe the world. Its geology consists of three windows. Figure 13: The three windows ...
  2. Investing

    Scenario Analysis Provides Glimpse Of Portfolio Potential

    This statistical method estimates how far a stock might fall in a worst-case scenario.
  3. Markets

    Guide To Oil And Gas Plays In North America: Marcellus

    The Marcellus shale is located in the Appalachian Basin and extends from southern New York to the western tip of Virginia from north to south. From east to west it begins at the eastern most ...
  4. Investing

    Explaining Expected Return

    The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome.
  5. Markets

    The Strategic Oil Reserves Explained

    Strategic oil reserves are one of the least known and least understood national security measures in the United States.
  6. Trading

    Multivariate Models: The Monte Carlo Analysis

    This decision-making tool integrates the idea that every decision has an impact on overall risk.
  7. Markets

    Peak Oil: What To Do When The Wells Run Dry

    Find out how to invest and protect your investments in this slippery sector.
  8. Markets

    Chesapeake Energy Wrestles Back Land From Ex-CEO (CHK, HES)

    Earlier this year Chesapeake Energy (NYSE: CHK) sued its founder and former CEO Aubrey McClendon, as well as the 20 investors in his new company's Utica Shale subsidiary. Chesapeake Energy alleged ...
  9. Investing

    Investing in Oil Stocks vs. Oil Companies: What's the Difference? (USO)

    Learn about the major advantages, disadvantages and risks of investing in oil companies and investing in oil and gas exploration companies.
  10. Markets

    The Next Big Commodities Boom Is Happening Here

    Think about how much money you would have made had you bought property in the Bakken Shale eight years ago...As recently as 2006, an acre of land in this desolate North Dakota region was selling ...
RELATED FAQS
  1. Why do oil stock prices drop?

    Doesn't lower oil prices mean more profit for companies that use oil products?  ... Read Answer >>
  2. How does an oil and gas company measure and state their reserves?

    Understand how oil and gas companies estimate possible reserves and how different classifications are used to designate the ... Read Answer >>
  3. How can I buy oil as an investment?

  4. How are oil reserves accounted for on an oil company's balance sheet?

    Oil reserves are estimated quantities of crude oil that have a high degree of certainty, usually 90%, of existence and exploitability. ... Read Answer >>
  5. What are risks associated with investing in the oil & gas drilling sector?

    Learn what unique risks are present for investment in the energy industry specifically affecting companies working in oil ... Read Answer >>
  6. Why are stocks and oil so correlated right now?

    Learn whether the stock market and oil prices will continue their highly correlated price relationship or decouple again ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center