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What is Objective Probability?

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

How Does Objective Probability Work?

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 Does Objective Probability Matter?

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.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.