What Is Objective Probability?

Objective probability is the probability that an event will occur based on an analysis in which
each measure is based on a recorded observation or a long history of collected data.

The concept of subjective probability can be contrasted with the idea subjective estimate.
Objective probabilities are a more accurate way to determine the probability of a given outcome
than subjective measurements. An objective probability will examine past data and use
mathematical equations involving the data to determine the likelihood of an independent event
occurring. An independent event is an event whose outcome is not influenced by prior events.
Subjective probability, by contrast, may utilize some method of data analysis but is largely
based on a person's estimate or intuition about a situation and the likely outcome.

Explaining Objective Probability

Objective probability allows the observer to gain insight from historical data to gain insight into
the likelihood of a given outcome. In contrast, subjective probability allows the observer to gain
insight by referencing things they have learned and their own experience.

Subjective probability varies from person to person—objective probability does not.

Objective probability is based on empirical evidence using statistics, experiments, and

mathematical measurements rather than relying on things like anecdotes, personal experience,
educated guesses, or hunches. In the financial world, using objective probability is particularly
important in order to avoid making emotional decisions when investing. People often rely on
hunches, rules of thumb, or old wive's tales to justify making the particular investment that too
much relies on subjective matters and emotional influence. Objective probability rids you of all of
that emotion and anecdotal nonsense.

KEY TAKEAWAYS
Objective probability is the probability an event will occur based on an analysis in which each
measure is based on a recorded observation or a long history of collected data.
In contrast, subjective probability allows the observer to gain insight by referencing things
they've learned and their own experience.
In finance, people ought to use objective probabilities to make decisions instead of relying on
subjective stories, personal experience, or anecdotal evidence.
Example of Objective Probability
For example, one could determine the objective probability that a coin will land "heads" up by
flipping it 100 times and recording each observation. This would yield an observation that the
coin landed on "heads" approximately 50% of the time. This is an example of objective
probability. An example of subjective probability is when a person who is educated about
weather patterns examines things such as barometric pressure, wind shear, ocean temperature,
and predicts the likelihood that a hurricane will head in a certain direction.