Probabilistic Inversion of Expert Judgments in the Quantification of Model Uncertainty

Bernd Kraan () and Tim Bedford ()
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Bernd Kraan: Department of Information, Technology and Systems, Delft University of Technology, CROSS, Mekelweg 4, 2628 CD Delft, The Netherlands, and Risk and Uncertainty Management (RandUM), Plein Delftzicht 51, 2627 CA Delft, The Netherlands
Tim Bedford: Department of Management Science, Strathclyde Business School, University of Strathclyde, 40 George Street, Glasgow G1 1QE, Scotland

Management Science, 2005, vol. 51, issue 6, 995-1006

Abstract: Expert judgment is frequently used to assess parameter values of quantitative management science models, particularly in decision-making contexts. Experts can, however, only be expected to assess observable quantities, not abstract model parameters. This means that we need a method for translating expert assessed uncertainties on model outputs into uncertainties on model parameter values. This process is called probabilistic inversion. The probability distribution on model parameters obtained in this way can be used in a variety of ways, but in particular in an uncertainty analysis or as a Bayes prior. This paper discusses computational algorithms that have proven successful in various projects and gives examples from environmental modelling and banking. Those algorithms are given a theoretical basis by adopting a minimum information approach to modelling partial information. The role of minimum information is two-fold: It enables us to resolve the problem of nonuniqueness of distributions given the information we have, and it provides numerical stability to the algorithm by guaranteeing convergence properties.

Keywords: multivariate distribution; uncertainty analysis; expert judgment; probabilistic inversion; relative information; minimum entropy; interior point method; credit scoring; environmental modeling (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:51:y:2005:i:6:p:995-1006

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