Bayesian Decision Analysis: Principles And Practice

This page intentionally left blank BAYESIAN DECISION ANALYSIS Bayesian decision analysis supports principled decision making in complex but structured domains. The focus of this textbook is on the faithful representation and conjugate analyses of discrete decision problems. It takes the reader from a formal analysis of simple decision problems to a careful analysis of the sometimes very complex and data rich structures confronted by practitioners. The book contains basic material on subjective probability theory and multiattribute utility theory, event and decision trees, Bayesian networks, influence diagrams and causal Bayesian networks. The author demonstrates when and how the theory can be successfully applied to a given decision problem, how data can be sampled and expert judgements elicited to support this analysis, and when and how an effective Bayesian decision analysis can be implemented. Evolving from a third-year undergraduate course taught by the author over many years, all of the material in this book will be accessible to a student who has completed introductory courses in probability and mathematical statistics. j i m q. s m i t h is a Professor of Statistics at the University of Warwick. BAYESIAN DECISION ANALYSIS Principles and Practice JIM Q. SMITH University of Warwick CAMBRI DGE UNIVER SITY PR ESS Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Dubai, Tokyo, Mexico City Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521764544 © J. Q. Smith 2010 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2010 Printed in the United Kingdom at the University Press, Cambridge A catalogue record for this publication is available from the British Library Library of Congress Cataloguing in publication Data Smith, J. Q., 1953– Bayesian decision analysis : principles and practice / Jim Q. Smith. p. cm. Includes bibliographical references and index. ISBN 978-0-521-76454-4 1. Bayesian statistical decision theory. I. Title. QA279.5.S628 2010 519.5
42–dc22 2010031690 ISBN 978-0-521-76454-4 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. Contents Preface page viii Part I Foundations of Decision Modelling 1 Introduction 1.1 Getting started 1.2 A simple framework for de