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Types Of Probability And Economic Models

712 words - 3 pages

Many events can't be predicted with total certainty. The best we can do is say how likely they are to happen, using the idea of probability. Probability theory is the branch of mathematics concerned with probability, the analysis of random phenomena. Probability is indeed used in real life, especially in the field of economics. Economists proceed to model the behavior of economic agents by assuming that these agents form probability estimates. However, there is an interesting division between economists who tend to treat these probability estimates as subjective and those who treat them as objective.
In order to get a clear understanding of how probability plays a role in economics, we must ...view middle of the document...

Such judgments have no guarantees and are very risky.
A very important idea that is often ignored by people engaging is such objective and subjective probability is the evaluation of Objective and Subjective Probability. People don’t always evaluate uncertain events by applying the laws of probability. An example of that is investing in the stock market. Investors often have an exaggerated belief that stock markets will to rise or fall, or that real estate prices will rise, despite the objective and subjective probabilities that this belief is highly unlikely to be true.
In order to clearly understand how probability plays into economics and how it plays a major role in our everyday life, I have chosen to use an objective approach to probability. I have to chosen to create a Macroeconomic model that allows one to predict trends in average world income growth that accord well with observation. Such economic model is objective because all predictions and assumptions will be solely based on previous economic data and statistics not taking into account any...

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