DEFINITION of 'Bayes' Theorem'
A formula for determining conditional probability named after 18thcentury British mathematician Thomas Bayes. The theorem provides a way to revise existing predictions or theories given new or additional evidence. In finance, Bayes' Theorem can be used to rate the risk of lending money to potential borrowers.
The formula is as follows:
Also called "Bayes' Rule."
INVESTOPEDIA EXPLAINS 'Bayes' Theorem'
Applications of the theorem are widespread and not limited to the financial realm. As an example, Bayes' Theorem can be used to determine the accuracy of medical test results by taking into consideration how likely any given person is to have a disease and the general accuracy of the test.
RELATED TERMS

Posterior Probability
The revised probability of an event occurring after taking into ... 
Financial Modeling
The process by which a firm constructs a financial representation ... 
Conditional Probability
Probability of an event or outcome based on the occurrence of ... 
Prior Probability
The probability that an event will reflect established beliefs ... 
Risk
The chance that an investment's actual return will be different ... 
Cape Cod Method
A method used to calculate loss reserves that uses weights proportional ...
RELATED FAQS

What is the difference between the cost of capital and the discount rate?
The cost of capital refers to the actual cost of financing business activity through either debt or equity capital. The discount ... Read Full Answer >> 
How does the market share of a few companies affect the HerfindahlHirschman Index ...
In economics and commercial law, the HerfindahlHirschman Index (HHI) is a widely used measure that indicates the amount ... Read Full Answer >> 
What does the rule of 70 indicate about a country's future economic growth?
The rule of 70 could be used to indicate the approximate number of years that it would take a company's economic growth to ... Read Full Answer >> 
How is the rule of 70 related to the growth rate of a variable?
The rule of 70 is related to the growth rate of a variable because it uses the growth rate in its approximation of the number ... Read Full Answer >> 
What is a "linear" exposure in Value at Risk (VaR) calculation?
A linear exposure in the valueatrisk, or VaR, calculation is represented by positions in stocks, bonds, commodities or ... Read Full Answer >> 
What is the criteria for a simple random sample?
Simple random sampling is the most basic form of sampling and can be a component of more precise, more complex sampling methods. ... Read Full Answer >>
Related Articles

Investing Basics
Regression Basics For Business Analysis
This tool is easy to use and can provide valuable information on financial analysis and forecasting. Find out how. 
Fundamental Analysis
Find The Right Fit With Probability Distributions
Discover a few of the most popular probability distributions and how to calculate them. 
Active Trading Fundamentals
Bet Smarter With The Monte Carlo Simulation
This technique can reduce uncertainty in estimating future outcomes. 
Forex Education
Financial Forecasting: The Bayesian Method
This method can help refine probability estimates using an intuitive process. 
Fundamental Analysis
What is a Representative Sample?
In statistics, a representative sample accurately represents the makeup of various subgroups in an entire data pool. 
Economics
Explaining Financial Analysis
Financial analysis is a general term that refers to using financial data to make business and investment decisions. 
Fundamental Analysis
How to Calculate a Turnover Ratio
A turnover ratio measures a mutual fund’s level of trading activity in a given time period, usually a year. 
Fundamental Analysis
Calculating Future Value
Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. 
Economics
What is Deadweight Loss?
Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources. 
Investing
The Strong Dollar’s (Real) Toll On Tech Stocks
A large portion of U.S. technology companies’ sales occur overseas, given the strong international business and consumer demand from many U.S. tech firms.