Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Objective Probability

What it is:

Objective probability is the chance that a specific thing will occur.

How it works (Example):

For example, let's say John buys a raffle ticket to support a local Girl Scouts troop. The troop sells 1,000 tickets. From an objective probability perspective, John has a 1 in 1,000 chance of winning. But subjectively, John thinks his chances of winning are much higher because "he has a good feeling about it." Nevertheless, his chances are still 1 in 1,000.

Why it Matters:

Objective probability is based on statistics, experiments, and mathematical measurements rather than on anecdotes, personal experience, or hunches. In the finance world, using objective probability is particularly important in order to avoid making emotional decisions when investing.

We often trick ourselves into thinking that we "always have had good luck investing in automotive stocks" or that we "never lose money on gold," for example, but without a series of objective observations on which to base these statements, they're little more than anecdotal, emotionally biased evidence that can trigger very expensive investing mistakes.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...