Probability Revision Under Act-Conditional States

This paper presents a simplified procedure to revise prior probabilities when these probabilities are conditional on acts. "Moral hazard" in insurance is one example where such conditions arise. Here coverage granted by the insurer may influence the probability of loss. The procedure developed in this paper permits evidence obtained from some experiment connected with one act to be employed in the revision of probabilities conditional not only on that act but on other acts as well. An example is presented and analyzed in which an insurance company must decide whether or not to grant full coverage to a medical group, based on evidence obtained from the claims history of that group under partial coverage.