Against the Gods concepts for managing uncertainty Introductions to a series of sessions about decisions on risks and opportunities

s provided by GMOs
David Tribe

Rembrandt Storm on the Sea of Galilee

 A good, readable source Peter Bernsteins book, Against the Gods The Greco Roman world lacked the conceptual tools to manage uncertain events Eastern Europe needed at least an ideas developed in the Hindu culture of India, and transmitted via the Arabic-Muslim culture The number Cifr or zero and the Arabic numbering system

Historical development of mathematical concepts relating to risk management

Reasoning about uncertain events

Only some of many new biotechnology ventures unlikely to be successful. How do I invest in them and make a profit? Only some of the patients treated with a new drug recovered from the disease. How do I know was of the drug was effective? Only some of the people getting biofortified vitamin A enriched rice are likely to benefit. How can I judge whether Golden Rice is a useful intervention for India?

Uncertain events
Events with more than one possible outcome Need the concept of probability to describe the outcomes of these events Operations with events Intersection of A and B, AB meaning both A and B Union of A and B, AB Complement of an event Ac or A, the event not A An event that can never occur is called the null event

Probability
Frequentist definition
P= frequency of an event in a repeated experiment or observation (random variable)

If an experimented is repeated a n time under essentially identical conditions, and the event A occurs m time, as n grows large the ratio m/n approaches a limit that is the probability of A Subjective definition
P= degree of belief in a proposition

Probabilities and degrees of belief

Assignment of a number P(x) between 0 and 1 to an event x If something does not occur (FALSE) probability=0= P(x) If something is certain(TRUE) P(x)=1 Negation: P(x)= 1 probability of NOT x

Events that cannot occur simultaneously

Bernoulli urn
nB black balls, N-nB white balls, N total balls Fraction black= f= nB /N

Blindfolded, you draw a ball from the urn with a spoon

How do you describe your degree of belief that the ball is black?

Benoulli process
Process without memory Success or failure only outcome Probability of a black ball remains unaltered by previous history

Another Bernoulli process pick a two smokers

Outcome of section First choice 0 1 0 1 Second choice 0 0 1 1 (1-f)(1-f) f(1-f) (1-f)f fxf 0 1 1 2 Probability of outcomes Number of successes

Probability of picking smokers in two picks

P(r=0)= (1-f)2=0.72=0.5 P(r=1)= f(1-f)+(1-f)f=2f(1-f)=0.42 P(r=2)=f2=0.32=0.09

Uncertainty
You draw 10 times from the described urn How many black balls (r) do you expect to obtain? How do you describe the confidence you have about the expected number What is the source of uncertainty in r?

MacKay 2003

Probability of r successes

Expected number of balls = Nf

A more realistic problem involving uncertainty

There are 2 black balls and 8 white balls in an urn It costs $100,000 to draw a ball from the urn If you get a black ball you will win $1,000,000 How do you chose to play to ensure you profit from participation

Managing uncertainties by portfolio diversification

From Chapter 4, WJ Bernstein 2004 The Birth of Plenty

Additional necessary probability concepts:

Conditional probability
E.g. probability urn number 3 was selected given 3 black balls were drawn P(u=3|nB=3)

Joint probability
E.g. probability that both 3 balls were drawn and urn 3 was the urn drawn from

A different (inverse) type of probability

MacKay 2003

MacKay 2003

Two sources of uncertainty

Random chance, variability ( which ball gets selected) Lack of knowledge (which urn is being used)

References
P. Bernstein. Against the Gods; the Remarkable Story of Risk M. Pagano and K. Gauvreau (2000) Principles of Biostatistics 2nd Edition, Chapter 6, Probability pages 125-130, Chapter 7 Theoretical probability Distributions p162171) W. Bernstein (2004) The Birth of Plenty:How the prosperity of the Modern World was Created, page 131-133 Risks of capital D. J. C. MacKay (2003) Information Theory, Inference, and Learning Algorithms, CUP Chapter 2 (pdf freely available on the internet)