Bayes Theorem
Bayes theorem is a rule for updating probability with evidence, often implemented using odds and likelihood ratios.
Definition
Bayes theorem describes how to update probability when you observe evidence. In practice, the clean implementation uses odds:
• Convert prior probability to prior odds.
• Multiply by likelihood ratio to get posterior odds.
• Convert posterior odds to posterior probability.
Why it matters
Bayes updates help you adjust beliefs systematically rather than react to noise. This is especially important when markets move quickly.