Bayesian Methods for Management and Business: Pragmatic Solutions for Real Problems

Chapter 1Introduction to Bayesian Methods

1.1 Bayesian Methods: An Aerial Survey

The modern business environment is awash in data. As a result, managers seek ways to summarize and simplify data to emphasize a select number of key aspects. They may also wish to examine whether certain kinds of structure and patterns are present in the data. Or, they may wish to use data to draw conclusions about other kinds of unobserved or latent phenomena they believe exist with respect to their businesses, customers, materials, and so on. These kinds of activities managers undertake are not mutually exclusive, but rather emphasize different aspects of the data discovery process.

Statistical methods are some of the most widely-used methods for data discovery. Many managers who have gone through an undergraduate or graduate business education will have encountered some of these methods. The methods that are typically taught to managers are called classical statistical methods. Classical methods are also known as frequentist methods because they derive from a frequency-based view of probability. Classical methods can be summarized as statistical methods that can be arrived at based on consideration of the likelihood function alone (Fisher, 1922). These include the familiar -test, simple linear regression, and logit analysis by maximum likelihood. The likelihood function can be thought of as the ...