APPROACHES OF ASSIGNING PROBABILITIES

There are three approaches of assigning probabilities, as follows:



1. Classical Approach:




Classical probability is predicated on the assumption that the outcomes of an experiment
are equally likely to happen. The classical probability utilizes rules and laws. It
involves an experiment. The following equation is used to assign classical probability:



P(X) = Number of favorable outcomes / Total number of possible
outcomes



Note that we can apply the classical probability when the events have the same chance of
occurring (called equally likely events), and the set of events are mutually exclusive and
collectively exhaustive.



2. Relative Frequency Approach:



Relative probability is based on cumulated historical data. The following equation is used
to assign this type of probability:




P(X) = Number of times an event occurred in the past/ Total number
of opportunities for the event to occur



Note that relative probability is not based on rules or laws but on what has happened in
the past. For example, your company wants to decide on the probability that its inspectors
are going to reject the next batch of raw materials from a supplier. Data collected from
your company record books show that the supplier had sent your company 80 batches in the
past, and inspectors had rejected 15 of them. By the method of relative probability, the
probability of the inspectors rejecting the next batch is 15/80, or 0.19. If the next
batch is rejected, the relative probability for the subsequent shipment would change to
16/81 = 0.20.



3. Subjective Approach:



The subjective probability is based on personal judgment, accumulation of knowledge, and
experience. For example, medical doctors sometimes assign subjective probabilities to the
length of life expectancy for people having cancer. Weather forecasting is another example
of subjective probability