Question

Probabilities may be defined in multiple ways, and all of these methods are valid as long as they satisfy the basic mathematical requirements for a probability distribution (i.e., the probabilities assigned to particular outcomes are non-negative and all of the probabilities for a particular event must sum to one). For cases like coin flips and rolls of a die, the classical probability definition may be used to assign equal probability to all possible outcomes (assuming the coin or die is properly constructed). For events that are observed multiple times, the probabilities may be assigned as the percentage of observed outcomes under the frequency definition of probability. For example, airlines often report the share of trips for which a particular flight was on time (say 80% on time), so we can use 0.80 as the probability that the next flight on this route is on time.

For events that are not repeated over time, we can still assign probabilities based on our experience or expertise, and this is known as the subjective definition of probability because it depends on an individual assessment of likelihood. Many of the probability examples presented in this chapter are based on subjective probabilities because they are one-time-only events that cannot be repeated (e.g., pricing decisions or strategic games).

Can you provide an example of a subjective probability that you may use to make decisions in your daily activities? Do you ever adjust this probability over time? If firms must use subjective probabilities to make decisions, how can they protect against costly mistakes that may arise from using poorly chosen subjective probabilities?

Answer 1

In daily life situatuiis most of the time, you won't perform actual probability problems, but you'll use subjective probability to make judgment calls and determine the best course of action. for an example every day you use probability to plan around the weather. You may decide to wear closed-toed shoes rather than sandals or take an umbrella to work. it is also use to predict whether conditions. In also subjective probability is almost used in bayesian analysis as a prior probability which is very frequently used to obtained ayes decision rule to protect risk.