Probability: Difference between revisions
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imported>Doug Williamson (Expand to give Health Warning about coin flip modelling of financial situations.) |
imported>Doug Williamson m (Link with Black swan page.) |
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== See also == | == See also == | ||
* [[Black swan]] | |||
* [[Conditional probability]] | * [[Conditional probability]] | ||
* [[Confidence intervals]] | * [[Confidence intervals]] | ||
* [[Frequency distribution]] | * [[Frequency distribution]] | ||
* [[Poisson distribution]] | * [[Poisson distribution]] | ||
Revision as of 11:34, 5 August 2014
The study of chance providing an objective measure of uncertainty.
Probabilities range between 1 (=100%) and 0 (=0%).
A probability of 100% means that an event is considered certain to occur.
A probability of 0% means that an event is considered certain not to occur.
For example, flipping an unbiased coin, the probability of getting a head is often modelled as 50%.
This simple model of a coin flip assumes that the only two possibilities are a head or a tail. Applying such simple models to financial situations, and treating financial outcomes as simple coin flips, may lead to errors resulting from:
- The coin landing on its side 'more often than it's supposed to'.
- The underlying assumption of an unbiased coin not being valid.
