''a'' priori probability, Financial Management

'A' Priori Probability

This is a probability computed by rationally examining existing information. A priori probability can most simply be explained as making a conclusion on the basis of deductive reasoning rather than research or computation. The biggest drawback to this technique of defining probabilities is that it can only be apply to a limited set of events.

Priori probabilities are most frequently used within the deduction technique of calculating probability. This is because you have to use logic to find out what outcomes of an event are possible so as to determine the number of ways these outcomes can take place. 

For instance, consider how the price of a share can vary. Its price can decrease, increase or stay the same. Thus, according to a priori probability, we can presume that there is a 1-in-3, or 33%, chance of one of the outcomes taking place (all else remaining equal).

 

 

Posted Date: 7/27/2012 1:21:06 AM | Location : United States







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