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Possibility vs. Probability

· 3 min read

I often hear arguments about the possibility of some event: "Keep money in the bank? And if the bank goes bankrupt?", "Give money to an entrepreneur? and if he does not render services and goes abroad with your money." "The state will find a way to take away the last savings," etc.

Reasoning in this way, we may soon reach idiocy: what if a meteorite falls on us right now? In this case, it makes no sense to do anything for the future.

In contrast to such reasoning, I propose to reason in terms of probability: can a meteorite fall? Yes, but what is the probability of this?!

A fairly large meteorite falls to earth about once every 100 years. From the point of view of a single person, this will happen only once in a lifetime (in the most optimistic scenario!). At the same time, it is still completely unclear where this meteorite will fall: the earth's area is 510 million km ^ 2. Even if the affected area reaches 10 km ^ 2, the probability of being in this place is 1/51 000 000 or ~0.000002%. Knowing this figure, we can safely say that it is definitely not worth spending your time on such fear!

But the problem with probabilities is much bigger when we talk about things whose probability cannot be calculated. By definition, probability is calculated from past data. And what if there is no data? Or are they obviously not taking into account the current situation and the "black swans"? It is possible to estimate the probability only subjectively. But for this assessment, we still need to figure out what will be the reason for this. And this is some analytical work.

You put money on deposit in the bank, and a friend tells you: "The bank will burst and you will lose all your money." Is it possible? Yes, it is possible. But what is the probability of this? What should happen for this bank to go bankrupt? The more knowledge about the internal work of banks, what they earn, etc., the more accurate the assessment. And already according to the received assessment, it is possible to quantify the risk.

Conclusions:

  • speaking about the possibility of an event, we begin to imagine it and it seems more likely. This is how our brain works.
  • probability allows you to more accurately assess the risks.
  • probabilistic estimation works well on deterministic things with available experience in the past, but poorly where there is little information.
  • as a consequence, we cannot escape from the subjective assessment of probability.
  • knowledge helps a lot in evaluation: the more we know about the process being evaluated, the more accurate the forecast.
  • experts can help with the assessment, but you still need to remember that such an assessment is subjective.