A type of probability known as subjective probability is one that is based on people’s subjective perceptions of an event. A person’s experience and beliefs about whether a particular outcome is likely to occur or not form their subjective probability. Subjective probability is based on an individual’s beliefs rather than any formal or mathematical calculations of the likelihood of an outcome.
When to use subjective probability
Subjective probability can be useful even though many professions rely on fact-based methods of calculating probability. Numerous applications of subjective probability can be found in statistics and finance, and they include:
Dealing with unknown variables
When there are unknowable variables involved, subjective probability can be used. You can use your knowledge, experience, and personal opinions to make decisions in circumstances where you lack sufficient information and to approximate the likelihood that an event will occur. You can use this to your advantage by using it to anticipate outcomes and make plans.
Estimating
When you need to estimate, subjective probability can be helpful as well. In many career fields, estimation is necessary, and you can use subjective probability to your advantage. You can estimate as accurately as possible by using subjective probability to draw from your prior experience and professional knowledge.
Making predictions
In many business contexts, subjective probability can be used to help you predict the likelihood of events happening. When using subjective probability, you can draw conclusions about the likelihood that an event will happen based on your opinions and beliefs.
What is subjective probability?
A type of probability known as subjective probability is one that is based on individual judgment and beliefs about the likelihood of an event occurring. Subjective probability emphasizes a person’s perceptions and experiences over objective facts and numerical data. There are also no formal calculations involved with subjective probability. If a probability varies greatly between different people, you can tell it’s subjective. This is due to the fact that personal biases frequently affect subjective probability.
Subjective probability differs from fact-based types of probability, including:
Examples of subjective probability
You can read through some illustrations to help you comprehend subjective probability and its uses. Here are a few instances where subjective probability has been used in various contexts:
Example 1
Imagine you just finished a job interview for the position of a financial analyst, and you want to forecast the results of your interview. Since there isn’t any mathematical information available in this situation to calculate the likelihood that you will be hired, you can make a prediction using subjective probability. Using your experience and opinions, you predict that theres an 80% chance that you got the job, as you met people at the company, learned about how you could advance at the company and received a follow-up email, which are all signs of a good interview
Example 2
You’re considering hiring a new employee and want to gauge their potential performance. Although you have their resume, you don’t have any information on how they might perform for your business. However, you had a positive interview experience and developed a favorable impression of the job candidate. You use your personal opinion to predict that there is a 75% chance the candidate could succeed at your company You use this data to decide whether to hire the applicant.
Example 3
Youre deciding whether to purchase stocks. You have some financial information, but it is insufficient for you to make a decision. Based on your past experience with similar stocks and your industry knowledge, you use subjective probability to predict that theres a 90% chance that you could make a profit off of these stocks Based on this probability, you decide to purchase the stocks.
Example 4
You recently met with a potential client, and you want to know whether you can close a deal with them in order to make future plans. Because you lack mathematical evidence on which to base your prediction, you use subjective probability. You use your experience meeting with previous clients to determine that the client did not appear interested in your company, so you predict that there is a 25% chance of making a deal with the client Using this knowledge, you decide not to create a plan until you have heard from the client.
Example 5
You want to forecast the likelihood that a recession will happen within the next few years so that your company can get ready. Since you lack many reliable data points, you base your prediction on your understanding of economics and professional experience. You use subjective probability to predict that there is a 50% chance of a recession occurring, so you decide to put company plans in place
Pros and cons of subjective probability
Subjective probability has a variety of applications and advantages, such as:
However, there are some drawbacks to using subjective probability, including:
Therefore, it’s crucial to take into account your particular situation and select the probability type that makes the most sense. This can help you determine the most accurate probability possible.
Subjective Probability
FAQ
What is subjective and objective probability?
The likelihood that an event will occur based on an analysis in which each factor is based on a documented observation or a long history of data collection is known as the objective probability. Contrarily, subjective probability enables the observer to draw conclusions based on what they have already learned and their personal experiences.
What are the 3 types of probability?
- Let S=sample space (set of all possible distinct outcomes) in the classical case (equally probable outcomes).
- Relative Frequency Definition. …
- Subjective Probability.
What is difference between relative and subjective probability?
A probability that is based on formal logic is referred to as classical probability. For example, the classical probability of getting a head in a coin toss is 50% Only subjective probability takes a person’s personal beliefs into account.
