PROBABILITY - Bayes’ Theorem. Business Statistics Dr. Gunjan Malhotra Assistant Professor Institute of Management Technology, Ghaziabad firstname.lastname@example.org email@example.com. Introduction – Bayes’ Theorem. Developed by Reverend Thomas Bayes (1702-1761).
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Dr. Gunjan Malhotra
Institute of Management Technology,
Bayes’ theorem is used to revise previously calculated probabilities after new information is obtained.
Bi = ith event of k mutually exclusive and collectively exhaustive events
A = new event that might impact P(Bi)
Example: L. S. Clothiers
Aproposed shopping center
will provide strong competition for
downtown businesses like L. S. Clothiers.
If the shopping center is built, the owner of
L. S. Clothiers feels it would be best to
relocate to the center.
The shopping center cannot be built unless a
zoning change is approved by the town council. The
planning board must first make a recommendation, for
or against the zoning change, to the council.
A1 = town council approves the zoning change
A2 = town council disapproves the change
Using subjective judgment:
P(A1) = .7, P(A2) = .3
The planning board has recommended against the zoning change. Let B denote the event of a negative recommendation by the planning board.
Given that B has occurred, should L. S. Clothiers revise the probabilities that the town council will approve or disapprove the zoning change?
Past history with the planning board and the town council indicates the following:
P(B|A1) = .2
P(B|A2) = .9
P(BC|A1) = .8
P(BC|A2) = .1
Given the planning board’s recommendation not to approve the zoning change, we revise the prior probabilities as follows:
The planning board’s recommendation is good news for L. S. Clothiers. The posterior probability of the town council approving the zoning change is .34 compared to a prior probability of .70.
that the well will be successful?
U = unsuccessful well
P(D|S) = 0.6 P(D|U) = 0.2
So the revised probability of success, given that this well has been scheduled for a detailed test, is 0.667
Apply Bayes’ Theorem:
Sum = 0.36