NOV 30, 2010 10:15am ET

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Bayes and Risk Management – Part 1

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A few years ago, after undergoing a routine physical, a friend of mine received some bad news. A test given to men his age came back positive, an indication of a pretty serious medical condition.  Worse, 99 percent of those with the disease test positive, while only 5 percent who don't have the condition get the bad news.  

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Comments (2)
Thanks Mr Miller, This was a nice overview of Bayesian fundamentals. Do you have any recommendations for books like "Bayesian Statistics for Dummies" or "Using Bayesian Probabilities in Business Risk Management"? Your substitution for P(D) was not entirely clear. It would seem that if 5% of folks who did not have the condition got a positive result, then the probability of not having the condition given a positive result would also be 5%. Thanks Shane
Posted by Shane P | Wednesday, December 01 2010 at 4:18PM ET
I was lucky enough to be lectured by a bayesian when I took my degree, but this is much clearer - thanks! What I like about the bayesian approach is the way it provides a framework for transparently and consistently updating estimated probabilities as new information becomes available, allowing forecasting systems to "learn". I've also used a bayesian belief network to combine subjective judgements about weak risk factors to identify the most likely cases to cause problems. I look forward to hearing more about business applications.
Posted by Colin E | Wednesday, December 01 2010 at 5:52PM ET
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