Explanation of example in video 2.

6 – Bayes Theorem
A company wants to introduce a new product and they have some past data. 40% of
the time the new product’s launch has been successful while 60% of the time they
have failed. So, they go to a market research agency(MRA) and ask them for help. They
have some prior information about the market research company as follows:
Prior knowledge (This is also called as Prior Probability):
P(successful product) = 40% = 0.4
P(failure product) = 60% = 0.6
Prior knowledge the company should have about the market research agency (This
is also called as Likelihood):
Probability that the market research agency rightfully predicts success given a new
product is a success = P(MRA predicts success | successful product)
Probability that the market research agency wrongfully predicts success given a new
product is a failure = P(MRA predicts success| failure product)
The company is interested now in:
Probability that the product will be successful given that the MRA predicts it successful
i.e.,
P(successful product | MRA predicts success) =
[P(MRA predicts success | successful product) x P(successful product)] / { [P(MRA
predicts success | successful product) x P(successful product)] + [P(MRA predicts
success| failure product) x P(failure product)] }
The above formula is the correct representation of the Bayes theorem which has been
shown in the video as follows:
P(B1 | A) = P(A | B1) x P(B1) / [ P(A | B1) x P(B1) + P(A | B2) x P(B2)]
where,
P(A) = P(MRA predicts success)
P(B1) = P(successful product)
P(B2) = P(failure product)
This P(successful product | MRA predicts success) is also called as “Posterior
Probability”