What is ‘A Priori Probability’
A priori probability is a probability calculated by logically examining existing information. A priori probability can most easily be described as making a conclusion based upon deductive reasoning rather than research or calculation. The largest drawback to this method of defining probabilities is that it can only be applied to a finite set of events.
Explaining ‘A Priori Probability’
Priori probabilities are most often used within the deduction method of calculating probability. This is because you must use logic to determine what outcomes of an event are possible in order to determine the number of ways these outcomes can occur.
For example, consider how the price of a share can change. Its price can increase, decrease or remain the same. Therefore, according to a priori probability, we can assume that there is a 1-in-3, or 33%, chance of one of the outcomes occurring (all else remaining equal).
Further Reading
- Pitfalls in the application of discriminant analysis in business, finance, and economics – www.jstor.org [PDF]
- The determinants of financing obstacles – www.sciencedirect.com [PDF]
- Herding and contrarian behavior in financial markets: An internet experiment – www.aeaweb.org [PDF]
- Economic uncertainty and econophysics – www.sciencedirect.com [PDF]
- Probability and uncertainty in economic modeling – www.aeaweb.org [PDF]
- High school economic education and access to financial services – onlinelibrary.wiley.com [PDF]
- Financial applications of discriminant analysis: a clarification – www.jstor.org [PDF]
- Time-dependent Hurst exponent in financial time series – www.sciencedirect.com [PDF]
- What is in a municipal bond rating? – onlinelibrary.wiley.com [PDF]
