Markets: A Rigorous Course

M12 · Problem 12 ★★★ Check

Correlated news

Two outlets report "tanker attacked near Hormuz". The second is a rewrite of the first wire story. (a) Compute the posterior a naive analyst gets by treating them as independent, using likelihoods (0.2,0.6,0.9)(0.2,0.6,0.9) twice. (b) Compute the correct posterior. (c) Generalise: if the second report is a copy with probability cc and an independent observation with probability 1−c1-c, derive its likelihood vector given the first. (d) Why is this the most common error in reading geopolitical news?

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Commas, ₹, % and 1e-3 notation are accepted.

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