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Kiakaha Wrote:
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> Thanks jonnykay...if someone could have a crack at
> explaining Bayes formula that would be awesome,
> it's still tripping me up!
> Cheers

bayes formula gives the probability of event A happening given that B happened USING THE FACT that we know the probability of B happening given A happened.

bayes formula is as follows:

P(A|B)*P(B) = P(B|A)*P(A)

note that the above equation = P(A and B) because P(A|B) = P(A and B)/ P(B) and P(B|A) = P(A and B)/ P(A).

I will illustrate with a simple example.

suppose the probability of someone passing CFA level I given they studied 300+ hrs is 0.5. The probability of someone studying 300 +hrs is 0.25. we also know the probability of someone passing Level I is about 0.38.

lets look at what we know:

P(Pass | 300+hrs of study) = 0.5, P(300+hrs of study) = 0.25 and P(Pass) = 0.38.

now we ask the question, what is the probability someone studied 300+hrs GIVEN that they passed the exam, P(300+ | Pass) = ?

we use the formula to solve

P(Pass | 300+ hrs)*P(300+hrs) = P(300+ | Pass)*P(Pass)
0.5*0.25 = P(300+|Pass)*0.38.

P(300+|Pass) = 0.33.

note carefully the difference between P(Pass | 300+) and P(300+|Pass). they are NOT always the same.



Edited 1 time(s). Last edit at Thursday, February 17, 2011 at 07:34PM by BayStreet.