EXAMPLE 13 Subjective method for assigning probability

A financial analyst is interested in the probability that the Dow Jones Industrial Average will go down today. Suppose the Chairman of the Federal Reserve warned against inflation in a major speech yesterday. How would the financial analyst use this information to subjectively assign the probability that the stock market will go down today?

Solution

Through long professional experience, the financial analyst has seen the Dow go down—often, the day after speeches by the Federal Reserve Chairman warning against inflation. She therefore assigns a subjective probability that the probability the Dow Jones Industrial Average will go down today is 75%. Although the exact subjective probability assigned by other financial analysts may differ somewhat, most will probably share the opinion that the Dow will decrease today.