Bayes' Theorem
Categories: Financial Theory, Derivatives
The What If? machine of probability formulas.
There are tons, literally tons, of historical data on how different investments have performed. But what if a condition, like consumer confidence, has suddenly changed? How could we use the historical performance of the stock to determine what would have happened differently if consumer confidence was at the lower rate it is now...instead of what it was then?
Bayes' Theorem allows us to use the historical data about what really happened, along with the newly changed condition, to go back in time and see what likely would have happened to the investment if consumer confidence had been at a different value.
