Probability: Difference between revisions

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The study of chance providing an objective measure of uncertainty.
The study of chance providing an objective measure of uncertainty.


Probabilities range between 1 (=100%) and 0 (=0%).   
 
Probabilities range between 1 (= 100%) and 0 (= 0%).   


A probability of 100% means that an event is considered certain to occur.  
A probability of 100% means that an event is considered certain to occur.  
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A probability of 0% means that an event is considered certain not to occur.   
A probability of 0% means that an event is considered certain not to occur.   


Tossing an unbiased coin, the probability of getting a head is 50%.
 
For example, flipping an unbiased coin, the probability of getting a head is often modelled as 50%.
 
 
===The problem===
 
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 edge 'more often than it's supposed to'.
#The underlying assumption of an unbiased coin not being a valid one. This kind of assumption is usually much too simple.




== See also ==
== See also ==
* [[Black swan]]
* [[Conditional probability]]
* [[Conditional probability]]
* [[Confidence intervals]]
* [[Confidence interval]]
* [[Frequency distribution]]
* [[Frequency distribution]]
* [[Mutually exclusive]]
* [[Poisson distribution]]
* [[Poisson distribution]]
[[Category:The_business_context]]
[[Category:Identify_and_assess_risks]]
[[Category:Manage_risks]]
[[Category:Risk_frameworks]]
[[Category:Risk_reporting]]

Latest revision as of 16:59, 24 December 2019

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%.


The problem

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:

  1. The coin landing on its edge 'more often than it's supposed to'.
  2. The underlying assumption of an unbiased coin not being a valid one. This kind of assumption is usually much too simple.


See also