Essay06 Essay Example | Topics and Well Written Essays - 500 words

Essay06 - Essay Example inty differ in that in risk, the outcome is unknown but the distribution of the outcome is not known however in uncertainty, both the outcome and the distribution of the outcome are not known (Samuelson and Stephen, 501). Probability of an outcome is the odds that the outcome will occur (Samuelson and Stephen, 501). The three types of probability discussed in the book are relative frequency, subjective probability, and theoretical probability. The difference in these methods in generating probability is that the theoretical probability assigns equal likelihood to all possible outcomes of an experiment, therefore, the chances of an event occurring is 1/n for each possible outcome. Relative frequency probability type gives the probability of an event through finding the ratio of the times the event occurs and the number of trials undertaken. Subjective probability determines the probability of an outcome â€Å"represents the decision maker’s degree o belief that the outcome will occur† (Samuelson and Stephen, 501). Statistical inference involves the use of statistical techniques for generating conclusions from a set amount of data through observation or sampling. Statistical inference using historical data involves the generation of conclusions from data that was collected a long time ago. Statistical bias using historical data creates bias in rapidly changing markets because of a change in the conditions of the market when the information was collected and the current market situation. The basis of the data collected could have changed and the current conditions reflect a difference; hence, the conclusions made reflect on the past and not the market situation currently as there are frequent changes in the market conditions resulting in statistical bias. The other reason for the bias in statistical inference of historical data is that statistical inference is affected by the random variation of the data over time and this variation results in the change of the