Probability - Applications

Applications

Probability theory is applied in everyday life in risk assessment and in trade on financial markets. Governments apply probabilistic methods in environmental regulation, where it is called pathway analysis. A good example is the effect of the perceived probability of any widespread Middle East conflict on oil prices—which have ripple effects in the economy as a whole. An assessment by a commodity trader that a war is more likely vs. less likely sends prices up or down, and signals other traders of that opinion. Accordingly, the probabilities are neither assessed independently nor necessarily very rationally. The theory of behavioral finance emerged to describe the effect of such groupthink on pricing, on policy, and on peace and conflict.

The discovery of rigorous methods to assess and combine probability assessments has changed society. It is important for most citizens to understand how probability assessments are made, and how they contribute to decisions.

Another significant application of probability theory in everyday life is reliability. Many consumer products, such as automobiles and consumer electronics, use reliability theory in product design to reduce the probability of failure. Failure probability may influence a manufacture's decisions on a product's warranty.

The cache language model and other statistical language models that are used in natural language processing are also examples of applications of probability theory.

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