3. Introduction to probability

An understanding of probability widens the suite of modeling tools to include processes that exhibit inherent uncertainty.

Examples:

The closing value of the Nasdaq stock index tomorrow.

The occurrence of a category 5 hurricane directly impacting Miami next year.

Whether or not a person purchases my new product next week.

Measuring the risk that a firm goes bankrupt.

These are all interesting questions, but are best summarized by answers that involve probabilities.

The truth is, that almost everything we deal with has an element of uncertainty about it.

Measuring this uncertainty is the role of probability.

Understanding probability makes you a more sophisticated consumer of information. Example.

A variable of interest, that is random, is termed a random variable.