1---
 2meta: 
 3  date: false
 4  reading_time: false
 5title: "Probability"
 6date: 2023-10-05
 7description: "A quantitative measure of the chance that a random event will occur."
 8tags: ["probability", "quantitative measure", "random event", "economics"]
 9---
10
11## Background
12
13Probability is a fundamental concept in statistics, mathematics, and a wide range of applied fields, including economics. It quantifies the likelihood of the occurrence of different possible outcomes in an uncertain event or situation. 
14
15## Historical Context
16
17The concept of probability has a rich history that can be traced back to ancient civilizations, but it became formally established with the work of mathematicians like Blaise Pascal and Pierre de Fermat in the 17th century. The development of probability theory has been instrumental in the formulation of statistical theories and methods.
18
19## Definitions and Concepts
20
21Probability, in essence, is a quantitative measure of the chance that a random event will occur. It is expressed by a number between 0 and 1, where:
22- 0 indicates absolute impossibility,
23- and 1 indicates absolute certainty.  
24   
25In the context of economics, probability helps in making informed decisions under uncertainty by assessing the risks and potential outcomes of different actions.
26
27## Major Analytical Frameworks
28
29### Classical Economics
30
31While not prominently featured in classical economics, concepts of probability do influence classical economic thinking especially in contexts involving risk assessment and market predictions.
32
33### Neoclassical Economics
34
35Neoclassical economics incorporates probability into its analyses of market behavior, decision-making under uncertainty, and expectations theory. Having a clear probability measure helps in defining rational choices.
36
37### Keynesian Economics
38
39John Maynard Keynes acknowledged the role of probability when emphasizing uncertainties within economic activities and markets, affecting everything from investments to consumption decisions.
40
41### Marxian Economics
42
43Although probability is less directly applied within Marxian frameworks, the notion of uncertainty and the probability of different economic crises occurring can highlight the vulnerabilities in capitalist markets.
44
45### Institutional Economics
46
47Institutional economics often addresses the impact of probabilistic events, such as financial crises or policy changes, on economic structures and behaviors.
48
49### Behavioral Economics
50
51In behavioral economics, probability plays a crucial role in understanding how real individuals perceive risks and uncertainties which often diverge from the purely rational agent paradigm found in other economic schools of thought.
52
53### Post-Keynesian Economics
54
55Post-Keynesian economics dives into the deeper uncertainties underlying economic phenomena, emphasizing decision-making processes where probabilities are not always well defined.
56
57### Austrian Economics
58
59Probability is used for understanding entrepreneurial uncertainty and market dynamics in Austrian economics.
60
61### Development Economics
62
63Understanding the probability of various outcomes can significantly aid in development economics by guiding the formulation of policies and assessing the risks faced by economies in transition.
64
65### Monetarism
66
67Monetarist theories often incorporate probabilistic assessments to understand the impact of monetary policies on economic variables like inflation and employment.
68
69## Comparative Analysis
70
71Probability offers a tool for associating certainty and risk across various economic theories, providing comparable measures to evaluate outcomes and scenarios in both micro- and macroeconomics.
72
73## Case Studies
74
751. **Financial Markets**: The use of probability in assessing the risk of financial instruments and predicting market trends.
762. **Policy Decisions**: The role of probability analysis in the efficacy of economic policies, such as the likelihood of a fiscal stimulus succeeding.
77
78## Suggested Books for Further Studies
79
801. "Statistics and Probability in Economics" by Charles F. Carter and Anthony L. Travers
812. "Introduction to Probability and Statistics for Engineers and Scientists" by Sheldon M. Ross
823. "Statistical Inference as Severe Testing: How to Get Beyond the Statistics Wars" by Deborah Mayo
83
84## Related Terms with Definitions
85- **Risk**: The possibility of a financial loss or a lower-than-expected return.
86- **Uncertainty**: The lack of complete certainty, that is, the existence of more than one possibility.
87- **Expected Value**: The anticipated value for a given investment or decision making under uncertainty.