Maximum likelihood
Quantitative Finance glossary · Probability, Statistics & Linear Algebra
Definition
An estimation method that chooses the parameter value making the observed data most probable.
Maximum likelihood in plain English
Imagine you find a coin on the ground, flip it 10 times, and get 7 heads. Was it a fair coin, or one biased toward heads? Maximum likelihood answers this by picking the bias that would make "7 heads out of 10" the least surprising thing to see — here, a 70% chance of heads. In general, it's a recipe for guessing a hidden setting (a "parameter") behind your data: try every possible value, and keep the one under which the data you actually observed was most probable. It's one of the most widely used ways to fit a model to real-world numbers.
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