Can someone explain the difference? The Schweser notes do a pretty bad job at it… Thanks, Varang
Empirical prob are what you compute from historical data A priori prob is your belief about the future. In the past 5 years, let’s say that 5% of the companies listed on US stock markets went bankrupt. Using 5% to forecast the probability that a company goes bankrupt in the next year consists of using empirical probabilities. If, on the other hand, I believe that the economy will slow down and that we will experience more bankruptcy than in the recent past, then I may assess a 10% probability that a company goes bankrupt next year. this would be an a priori probability.
This seems like some serious misinformation in my opinion in the above example. A BELIEF about something is a SUBJECTIVE probability, you didn’t use logic or reasoning to deduce the idea. Lemme quote the CFAI text: “a subjective probability [is] one drawing on personal or subjective judgment” page 320 of book 1 A priori probabilities are probabilities that have been deduced using logical analysis. Lemme quote the CFAI text again: “… an a priori probability [is] one based on logical analysis rather than on observation or personal judgment” (ie. counting methods are an example). A priori probabilities are NOT subjective ie like the cfai text says, they don’t vary from person to person, they are objective.
iamsmart Your are show off Madame Bovary, I think your hot varang better learn/nail this concept now cause it will come in handy when learning Bayes Formula
I’m with MadameBovary on this. A priori probabilities can be objetive, subjective, drawn from a hat, based on improper priors, etc…
Thanks everyone for your help. - Varang