Examples of Law of Large Numbers
An example explaining law of large numbersis added below:
Imagine your bag contains blue and red balls. Assume the bag holds 50% blue balls and 50% red balls. Drawing just one ball from the bag might result in a red or a blue ball, but it would be difficult to forecast the precise hue.
Now imagine, you take 10 balls from the bag one at a time, noting the colors. You might get six red balls and four blue balls or perhaps seven red balls and three blue balls. Although your little sample’s red to blue ball ratio would not be exactly 50:50, it would most certainly be near.
Law of Large Numbers, however, informs us that the ratio of red balls to blue balls in your total sample would get closer and closer to the theoretical ratio of 50:50 if you kept drawing balls from the bag and tracking the colors hundreds or perhaps thousands of times.
Law of Large Numbers
Law of Large Numbers (LLN) is a mathematical theorem that states the average of the results obtained from many independent random samples.
In this article, we have discussed the Law of Large Numbers definition, its limitations, examples and others in detail.
Table of Content
- What is Law of Large Numbers?
- Limitation of Law of Large Numbers
- Types of Law of Large Numbers
- Why is Law of Large Numbers Important?
- Law of Large Numbers (LLN) and Central Limit Theorem (CLT)
- Examples of Law of Large Numbers
- Law of Large Numbers in Finance