Probability: Difference between revisions

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imported>Doug Williamson
m (Spacing 21/8/13)
imported>Doug Williamson
(Expand to give Health Warning about coin flip modelling of financial situations.)
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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%.
 
 
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.





Revision as of 11:32, 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:

  1. The coin landing on its side 'more often than it's supposed to'.
  2. The underlying assumption of an unbiased coin not being valid.


See also