Subjective Probability
What Does Subjective Probability Mean?
A subjective probability is the perceived likelihood of a certain outcome occurring. It is not an actual mathematical calculation of the odds, but rather a measure based on personal opinions, beliefs, biases, and emotions. For example, a fan of the Boston Red Sox might claim their favorite team has a 50% chance of winning the World Series, even without any statistical evidence. The probability is not based on the team’s performance or record but on the fan’s personal beliefs and confidence.
Insuranceopedia Explains Subjective Probability
People use subjective probability every day because they often don’t have the time or need to calculate the actual odds of a particular outcome. However, insurance companies avoid using subjective probability because it doesn’t provide sufficiently accurate results. Instead, they focus on objective probability, which is a calculation of the odds based on past data and results. This approach allows them to set their prices more accurately and reduce the risk of facing unexpected, large losses.
