Prior probabilities represent what we originally believed before new evidence is uncovered. New information is used to produce updated probabilities and is a more accurate measure of a potential outcome. For example, three acres of land have the labels A, B and C. One acre has reserves of oil below its surface, while the other two do not. The probability of oil being on acre C is one third, or 0.333. A drilling test is conducted on acre B, and the results indicate that no oil is present at the location. Since acres A and C are the only candidates for oil reserves, the prior probability of 0.333 becomes 0.5, as each acre has one out of two chances.
Investment dictionary. Academic. 2012.
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