Aha! So you were wrong… the probability of flipping a head must be 2/3 or 66% right? Because that’s what you’ve flipped so far…Īs you continue playing this game, we both know that your record will get closer and closer to 50% as you flip more and more. The first two coins you flip are heads! Wow! It appears as if the rule is that every time you flip a coin, you get a head! The probability of flipping a head is 100% according to your data! You are unsure though, so you keep flipping. So you decide to record the number of heads and tails you flip. Let’s also assume that you’ve grown up under a rock and you don’t know that the probability of flipping a head is 50%. Let’s say you get discouraged and you decide you’re going to play a different game instead. Suddenly, your neglected paperwork seems much more friendly. You could try 100 times and have it happen only once or twice. The probability of flipping 6 heads in a row is 1/64 or 1.5%. The probabilities get lower and lower very quickly. So statistically you’ll only flip 2 heads in a row once out of every 4 tries. This is because the probability of you flipping a head is 1/2 or 50%. But you start to find that it’s much harder to keep getting heads (assuming you’re flipping fairly). You flip one or two heads in a row easily. You pull out a coin and you see how many heads you can flip in a row. Let’s say you’re sitting in your office, bored by whatever menial task is sitting in your inbox, and you decide to play a game. The first concept that insurance relies on is known to statisticians as “the Law of Large numbers” and it’s best explained by example. The following is a VERY simple description of the math that lets your insurer protect you. But the concepts behind why insurance works are relatively simple and easy to grasp for me, they offer a great example how inferential statistics never lie when calculated correctly. If you really can’t stand math and have no interest in how insurance agencies can afford to replace huge losses frequently, then look at another post. This is surprising to me, having blogged about insurance for over a year now and having loved math since childhood as a Rottweiler might love a T-bone steak. Today, I was figuratively slapped in the face by the realization that I’ve never blogged about the mathematics behind insurance.
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