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Activity Number: 324 - Causal Inference, Empirical Bayes and Related Topics in Regression
Type: Contributed
Date/Time: Wednesday, August 5, 2020 : 10:00 AM to 2:00 PM
Sponsor: IMS
Abstract #309865
Title: Irrational Exuberance: Correcting Bias in Probability Estimates
Author(s): Bradley Rava* and Gareth James and Peter Radchenko
Companies: University of Southern California and University of Southern California and University of Sydney
Keywords: Empirical Bayes; selection bias; excess certainty; Tweedie’s formula
Abstract:

We consider the common setting where one observes probability estimates for a large number of events, such as default risks for numerous bonds. Unfortunately, even with unbiased estimates, selecting events corresponding to the most extreme probabilities can result in systematically underestimating the true level of uncertainty. We develop an empirical Bayes approach “Excess Certainty Adjusted Probabilities” (ECAP), using a variant of Tweedie’s formula, which updates probability estimates to correct for selection bias. ECAP is a flexible non-parametric method, which directly estimates the score function associated with the probability estimates, so it does not need to make any restrictive assumptions about the prior on the true probabilities. ECAP also works well in settings where the probability estimates are biased. We demonstrate through theoretical results, simulations, and an analysis of two real world data sets, that ECAP can provide significant improvements over the original probability estimates.


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