ABSTRACT
We may have some estimate about whether a certain event will occur (e.g., that a particular stock will go up today). However, additional information can often be used to refine our estimates. If the Federal Reserve Board has just announced an increase in the prime lending rate, then we may be less optimistic that our stock will go up today. In this chapter, we will see how it is possible to revise our prior estimates in view of new information to obtain updated estimates. Calculation of conditional probabilities allows us to incorporate such new information. We also illustrate the difference between conditional probabilities and their inverses, which is frequently the cause of serious misinterpretations. When inferences go wrong in the courtroom, forensics lab, or doctor’s office, they can have devastating effects on people’s lives. The proper application of conditional probabilities can assist us in making logically defensible decisions in the face of seemingly paradoxical situations.
