What Is Objective Probability?

Objective probability is the probability that an event will occur based on an analysis in which each measure is based on a recorded observation or a long history of collected data.

The concept of subjective probability can be contrasted with the idea subjective estimate. Objective probabilities are a more accurate way to determine the probability of a given outcome than subjective measurements. An objective probability will examine past data and use mathematical equations involving the data to determine the likelihood of an independent event occurring. An independent event is an event whose outcome is not influenced by prior events. Subjective probability, by contrast, may utilize some method of data analysis but is largely based on a person's estimate or intuition about a situation and the likely outcome.

Explaining Objective Probability

Objective probability allows the observer to gain insight from historical data to gain insight into the likelihood of a given outcome. In contrast, subjective probability allows the observer to gain insight by referencing things they have learned and their own experience.

Subjective probability varies from person to person—objective probability does not.

Objective probability is based on empirical evidence using statistics, experiments, and mathematical measurements rather than relying on things like anecdotes, personal experience, educated guesses, or hunches. In the financial world, using objective probability is particularly important in order to avoid making emotional decisions when investing. People often rely on hunches, rules of thumb, or old wive's tales to justify making the particular investment that too much relies on subjective matters and emotional influence. Objective probability rids you of all of that emotion and anecdotal nonsense.

Key Takeaways

  • Objective probability is the probability an event will occur based on an analysis in which each measure is based on 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.

Example of Objective Probability

For example, one could determine the objective probability that a coin will land "heads" up by flipping it 100 times and recording each observation. This would yield an observation that the coin landed on "heads" approximately 50% of the time. This is an example of objective probability. An example of subjective probability is when a person who is educated about weather patterns examines things such as barometric pressure, wind shear, ocean temperature, and predicts the likelihood that a hurricane will head in a certain direction.

When performing any statistical analysis, it is important for each observation to be an independent event that has not been subject to manipulation. The less biased each observation is, the less biased the end probability will be.