Quantitative Analysis for Management, 13/e

3.7 How Probability Values Are Estimated by Bayesian Analysis

Bayes’ Theorem allows decision makers to revise probability values.

There are many ways of getting probability data for a problem such as Thompson’s. The numbers (such as 0.78, 0.22, 0.27, and 0.73 in Figure 3.4) can be assessed by a manager based on experience and intuition. They can be derived from historical data, or they can be computed from other available data using Bayes’ Theorem. The advantage of Bayes’ Theorem is that it incorporates both our initial estimates of the probabilities and information about the accuracy of the information source (e.g., market research survey).

The Bayes’ Theorem approach recognizes that a decision maker does not know with certainty what state ...