Bayesian Theory


Definition: Bayesian Theory is a theory which is used by scientists to explain and predict decision-making.
Bayes developed rules for weighing the likelihood of different events and their expected outcomes. According to Bayesian theory, managers should make decisions, based on a calculation of the probabilities of all the possible outcomes of a situation.
By weighing the value of each outcome by the probability and summing the totals, they can calculate "expected values" for a decision. If the expected value is positive, then the decision should be accepted; if it is negative, it should be avoided.
Does not include appreciation of downside risk nor unknown risks (see Plausibility Theory).


More on individual decision making: Anchoring Bias, Black Swan Theory, Bounded Rationality, Cognitive Bias, Cognitive Dissonance, more...


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