Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Objective Probability

What it is:

Objective probability is the chance that a specific thing will occur.

How it works (Example):

For example, let's say John buys a raffle ticket to support a local Girl Scouts troop. The troop sells 1,000 tickets. From an objective probability perspective, John has a 1 in 1,000 chance of winning. But subjectively, John thinks his chances of winning are much higher because "he has a good feeling about it." Nevertheless, his chances are still 1 in 1,000.

Why it Matters:

Objective probability is based on statistics, experiments, and mathematical measurements rather than on anecdotes, personal experience, or hunches. In the finance world, using objective probability is particularly important in order to avoid making emotional decisions when investing.

We often trick ourselves into thinking that we "always have had good luck investing in automotive stocks" or that we "never lose money on gold," for example, but without a series of objective observations on which to base these statements, they're little more than anecdotal, emotionally biased evidence that can trigger very expensive investing mistakes.