Sensitivity of the Posterior Mean on the Prior Assumptions: An Application of the Ellipsoid Bound Theorem

Abstract

This study examines the sensitivity of the posterior mean to change in the prior assumptions. Three plausible choices of prior which include informative, relative-non informative and non-informative priors are considered. The paper considers information level for a prior to cause a notable change in the Bayesian posterior point estimate. The study develops a framework for evaluating a bound for a robust posterior point estimate. The Ellipsoid Bound theorem is employed to derive the Ellipsoid Bound for an independent normal gamma prior distribution. The proposed modification ellipsoid bound for the large prior was establised by varrying different variance co-variance sizes for the independent normal gamma prior. This bound represents the range for the posterior mean when is insensitive and when it’s sensitive in both location and spread. The result shows that; for a large prior parameter value (greater than the OLS estimate) with a positive definite prior variance covariance matrix, and prior parameter values interval which contains the OLS estimate then, the posterior estimate will be less than both the OLS and the prior estimates. Similarly, if the lower bound of the prior parameter values range is greater than the OLS estimate then: The posterior estimate will be greater than the OLS estimate but smaller than the prior estimate. Furthermore, it is observed that no matter the degrees of confidence in the prior values, data information is powerful enough to modify it.