Subjective Probability

Updated: 09 June 2023

What Does Subjective Probability Mean?

A subjective probability is the perceived chance of a certain outcome happening. It is not an actual mathematical calculation of the odds, but rather a measure based on personal opinion, beliefs, prejudices, and emotions. For example, a fan of the Boston Red Sox might say their favorite team has a 50% chance of winning the World Series, despite not having any statistical evidence. The probability isn't based on the team’s record but on the fan's personal beliefs and confidence.

Insuranceopedia Explains Subjective Probability

People use subjective probability every day because they don’t have time or the need to calculate the actual odds of a certain result coming to pass. Insurance companies, however, avoid using subjective probability because it doesn't lead to accurate enough results. Instead, they look at the objective probability of events happening, which is a calculation of the odds based on past results. This way, they can more accurately set their prices and avoid getting hit with unexpected, large losses.

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