ECO204Y5 Chapter Notes - Chapter 5.1-5.2, 5.4: Bayesian Probability, Large Deviations Theory, Standard Deviation
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Chapter 5. 1 to 5. 2, 5. 4 uncertainty & Des(cid:272)ri(cid:271)i(cid:374)g risk; prefere(cid:374)(cid:272)es toward risk; a(cid:374)d de(cid:373)a(cid:374)d for risky assets. Probability is the likelihood that a given outcome will occur. An objective interpretation/estimate of probability relies on the frequency with which certain events tend to occur (in the past). Sometimes, there are no similar past experiences to help measure probability. Here, objective measures of probability can"t be deduced. Subjective probability is the perception that an outcome will occur, based on a person"s judgment or experience but not necessarily on past frequency. Either different information or different abilities to process the same information can cause subjective probabilities to vary among individuals. The expected value associated with an uncertain situation is a weighted average of the payoffs (values associated with all possible outcomes). Probabilities of each outcome are used as weights. Thus, the expected value measures the central tendency the payoff expected on average.
