Problem 20: Table of POSTERIOR Probabilities

Posterion Probablity (P(Mi/Fj))

Natural Event: Market
condition (M)
and its Probability
Forecast (F) and its probability
Forecast Favorable
Market (.75)
Forecast Unavorable
Market (.!5)
National Market
Success (0.7)
.9 .4
National Market
Failure (0.3)
.1 .6
1.00 1.00 1.00
Notes:
1) The Natural !ent is al"a#s $e#ond the control o% the &ecision Maker.
'ts (ro$a$ilit# and )ust $e *i!en or deduced. 't can $e deduced i% #ou kno"
the (ro$a$ilit# o% all other natural e!ents. For e+a)(le i% the (ro$a$ilit# o%
national )arket success is .7 the (ro$a$ilit# o% national )arket %ailure )ust
$e .3.
,) The (ro$a$ilities o% the Forecast e!ents (as e+a)(le o% an# e+ternal
in%or)ation- are *i!en). The %orecast e!ents in the a$o!e e+a)(le are
.Fa!ora$le Market/- and .0n%a!ora$le Market/. 1s in the case o% the
natural e!ents- the (ro$a$ilities o% the %orecast e!ents )ust $e *i!en or
deduced (rior to conductin* the $ack"ard induction. 'n our e+a)(le these
(ro$a$ilities are .72 and .,2 %or Fa!ora$le and 0n%a!ora$le si*nals-
res(ecti!el#.
3) The conditional (ro$a$ilities in the $od# o% the ta$le are called 3osterior
(ro$a$ilities. 'n these ta$les these are .9- .1 %or a %a!ora$le )arket %orecast
and .4 and .6. %or un%a!ora$le )arket %orecast. These (ro$a$ilities (ro!ide
the conditional (ro$a$ilit# o% the natural e!ent %or so)e s(eci%ic %orecast
e!ent. For e+a)(le .9 is the (ro$a$ilit# that there "ill $e a )arket success i%
%ollo"in* a %a!ora$le %orecast the (roduct "as )arketed nationall#.
Si)ilarl# .1 is the (ro$a$ilit# that there "ill $e a )arket %ailure i% %ollo"in*
a %a!ora$le %orecast the (roduct "as )arket nationall#.
4. Notice that as a result o% the decision )akin* (rocess so)e o% the cells
)a# ulti)atel# not e+ist. For e+a)(le- a decision )aker recei!in* a %orecast
o% non %a!ora$le )arket condition )a# decide to sto( %urther action and not
to )arket its (roduct nationall#. 4% course- an# (articular %orecast could
ha!e $een )istaken.
2. Notice that sa)(lin* in%or)ation is not (er%ect in%or)ation. That is a
%orecast is not a hundred (ercent correct. 5ad "e ha!e a (er%ect in%or)ation
"e "ould ha!e o$tained al"a#s a (er%ect %orecast and the ta$le "ould ha!e
$een like that.
Posterior Probabilities in case o Perect "nor#ation
Natural Event: Market
condition (M)
and its Probability
Forecast (F) and its probability
'n the case o% a (er%ect in%or)ation %orecast.
Forecast Favorable
Market (.7)
Forecast Unavorable
Market (.$)
National Market
Success (0.7)
1 0
National Market
Failure (0.3)
0 1
1.00 1.00 1.00
'n e!er# case o% conditions leadin* to a national )arket success the %orecast
"ould ha!e $een %a!ora$le- and in e!er# case o% conditions leadin* to
national )arket %ailure the %orecast "ould ha!e $een un%a!ora$le. 5ence-
the (ro$a$ilit# o% the %orecast e!ent )ust also $e identical "ith this o% the
natural e!ent. The conditional (ro$a$ilities are clearl# 1 and 0- $ecause in a
(er%ect in%or)ation %orecast there are no %orecast )istakes.
6ut re)e)$er- the decision )aker has no control o!er an# natural e!ent and
its (ro$a$ilit#. 'n (articular- the decision )aker o$!iousl# cannot eli)inate
undesira$le e!ents. For e+a)(le he cannot eli)inate conditions leadin* to
lack o% de)and (National Market Failure) "hich occur "ith 307
(ro$a$ilit#. 1ll the decision )aker can do in case o% (er%ect in%or)ation is
to kno" the natural e!ent identit# in ad!ance o% choosin* its ne+t act. 1nd
then %ollo"in* this kno"led*e- the decision )aker chooses the o(ti)al act
%or the identi%ied natural e!ent. 1s in the case o% the Sa)(lin* 'n%or)ation
a$o!e- so)e o% the cells )a# ne!er $e actuali8ed - as a result o% the decision
)akin* (rocess. For e+a)(le- a decision )aker )a# decide to a$ort in case
o% a non %a!ora$le %orecast rather than )arket its (roduct nationall#.
3a*es 137913: contain a !er# *ood illustration o% the decision )akin*
(rocess under 3er%ect 'n%or)ation and its ;3' !aluation.