Bayes Theorem and Real-life Applications

Applications of Bayes' theorem in Business and Finance

In business and life, making the right decision the right decision is the most
essential thing you can do with the Bayes Theorem. Wrong judgments can haunt you for
the rest of your life, but the right decision can mean billions of dollars, years of
happiness, serenity, riches, and health, among other things. It's always beneficial to plan
for a bright future. (Nagarani, Karpagam, Vasuki, & Sundarakannan, 2021)
Consider the following scenarios:
a) When assessing interest rates.
Companies rely on interest rates for a variety of reasons, including
borrowing money, investing in the fixed income market, and trading currencies
internationally. Unexpected changes in interest rate values can be costly to a company's
bottom line and have a negative impact on profits and revenues. Companies can better
evaluate systematic changes in interest rates and direct their financial resources to take
advantage using the Bayes Theorem and estimated probabilities.
b) With a profit.
Businesses want to be on top of their net income streams, or the profit earned
after deducting expenses from the equation. For starters, net income is highly vulnerable
to external events such as legal proceedings, weather, the cost of necessary equipment
and materials, and geopolitical events. When probability scenarios arise, financial
decision-makers have a stronger platform to manage resources and make critical
decisions by plugging them into the net income equation.
c) For extending credit. Under the Bayes Theorem conditional probability
model, financial companies can make better decisions and better evaluate the risk of
lending cash to unfamiliar or even existing borrowers. For example, an existing client
may have had a good previous track record of repaying loans, but lately, the client has
been slow in playing This additional information, based on probability theory, can lead
the company to treat the slow payment history as a red flag, and either hike interest rates
on the loan or reject it altogether. (O'Connell, 2018) In business and in life, making the
correct decision is the most essential thing you can do with the Bayes Theorem. It might
imply making the Organization, Institution, or Company worth billions of dollars, years
of enjoyment, peace, riches, and health, and so on. It is always quite beneficial to decide
on a nice future.