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Bayesian Inference and the Principle of Maximum Entropy

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  • Duncan K. Foley
  • Ellis Scharfenaker

Abstract

Bayes' theorem incorporates distinct types of information through the likelihood and prior. Direct observations of state variables enter the likelihood and modify posterior probabilities through consistent updating. Information in terms of expected values of state variables modify posterior probabilities by constraining prior probabilities to be consistent with the information. Constraints on the prior can be exact, limiting hypothetical frequency distributions to only those that satisfy the constraints, or be approximate, allowing residual deviations from the exact constraint to some degree of tolerance. When the model parameters and constraint tolerances are known, posterior probability follows directly from Bayes' theorem. When parameters and tolerances are unknown a prior for them must be specified. When the system is close to statistical equilibrium the computation of posterior probabilities is simplified due to the concentration of the prior on the maximum entropy hypothesis. The relationship between maximum entropy reasoning and Bayes' theorem from this point of view is that maximum entropy reasoning is a special case of Bayesian inference with a constrained entropy-favoring prior.

Suggested Citation

  • Duncan K. Foley & Ellis Scharfenaker, 2024. "Bayesian Inference and the Principle of Maximum Entropy," Working Paper Series, Department of Economics, University of Utah 2024-03, University of Utah, Department of Economics.
  • Handle: RePEc:uta:papers:2024-03
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    File URL: https://econ.utah.edu/research/publications/2024_03.pdf
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    References listed on IDEAS

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    1. Ellis Scharfenaker & Gregor Semieniuk, 2017. "A Statistical Equilibrium Approach to the Distribution of Profit Rates," Metroeconomica, Wiley Blackwell, vol. 68(3), pages 465-499, July.
    2. repec:uta:papers:2023_02 is not listed on IDEAS
    3. Paulo L dos Santos & Ellis Scharfenaker, 2019. "Competition, self-organization, and social scaling—accounting for the observed distributions of Tobin’s q," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 28(6), pages 1587-1610.
    4. Ellis Scharfenaker & Duncan Foley, 2017. "Maximum Entropy Estimation of Statistical Equilibrium in Economic Quantal Response Models," Working Papers 1710, New School for Social Research, Department of Economics, revised May 2017.
    5. Soofi, E. S. & Retzer, J. J., 2002. "Information indices: unification and applications," Journal of Econometrics, Elsevier, vol. 107(1-2), pages 17-40, March.
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    Keywords

    Bayesian inference; Maximum entropy; Priors; Information theory; Statistical equilibrium JEL Classification:;
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