### Discuss the statistical model of bankruptcy

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Question: An accounting friend of yours has gone to great lengths to construct a statistical model of bankruptcy. Using the model, the probability that a firm will file for bankruptcy within a year is calculated on the basis of financial ratios. On hearing your explanation of subjective probability, your friend says that subjective probability may be all right for decision analysis, but his model gives objective probabilities on the basis of real data. Explain to him how his model is, to a great extent, based on subjective judgments. Comment also on the subjective judgments that a bank officer would have to make in using your friend's model.

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