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Bayesian inference
 

 

Baynesian inference

 

Then, based on the prior density functions and the likelihood functions of the data conditioned on each of the hypotheses, the prior odds ratio is modified to form a posterior odds ratio. In contrast to the classical approach, it is not necessary to accept or reject each hypothesis. If needed, such a decision can be made by minimizing the expected loss from making a wrong decision, using some specified loss function, where the expectations are calculated with respect to the posterior probabilities on each hypothesis.

 

Reference: Oxford Press Dictonary of Economics, 5th edt.