BAYES STRATEGIES

AND ESTIMATES OF
VALUE
Dr. D. V. Abraham
Outline
• Introduction
• Choosing decision rules in petroleum exploration
• Estimating the distribution of sizes of petroleum discoveries
• Evaluation of regional maps and drilling decisions
• Cost of error functions
• Exercises
Introduction
• Bayesian analysis allows you to combine prior information about a
population parameter with evidence from information contained in a
sample to guide the statistical inference process.
• A prior probability distribution for a parameter of interest is specified
first.
• The evidence is then obtained and combined through an application
of Bayes theorem to provide a posterior probability distribution for
the parameter.
Introduction
• Bayes methods are categorized by introducing initial probabilities that
certain events are true and then revising these estimates as more
information becomes available.
• The revised estimates are known as the posterior probabilities. For
instance, in a certain oil-producing region, it might be estimated that 20%
of the exploratory wells would be productive. But as drilling proceeds, the
additional information gained would permit revision of initial estimates.
• A factor considered in Bayesian analysis is the economic consequences of
the various possible actions and the Bayes estimate is the one
characterized by the least expected cost of error.
Introduction

• Fig 1: Conditional probability relations

Thomas Bayes basic formula is portrayed in the Venn diagram shown in fig 1.
the areas labelled A and B represent the respective probabilities of events A
and B, and their intersection AB indicates that there is some probability that
the outcome of a trial will include the occurrence of both events A and B.
Introduction
•  The following relations apply;

Which can be written as;

And the equality

=
Is obtained, which can be written as
Choosing decision rules in petroleum
exploration
• Geologic investigations can point out favourable new regions in which
to drill wells but then these are expensive, and after a number of
them are drilled, the decision must be made to continue or stop (so
as to channel the efforts elsewhere).
• The following conditions would indicate when to stop:
1. If it appears that no successful wells will be found, and
2. If it appears that the proportion of successful wells is too low to make the
total effort profitable.