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Witness says the cab was blue

Question

In a town 85%85\% of cabs are green and the remaining 15%15\% are blue. After a hit-and-run, a witness reports that the cab was blue. Tests show the witness identifies cab colour correctly 80%80\% of the time. Given the report, how likely is it that the cab really was blue?

Short answer

12/29≈41%12/29\approx41\%. By Bayes, P(blue∣says blue)=0.15×0.80.15×0.8+0.85×0.2=0.120.29P(\text{blue}\mid\text{says blue})=\dfrac{0.15\times0.8}{0.15\times0.8+0.85\times0.2}=\dfrac{0.12}{0.29}. The low base rate of blue cabs outweighs the witness's reliability.

Adapted from Wilmott, Frequently Asked Questions in Quantitative Finance, ch. 10 brainteaser 'Hit-and-run taxi', p.352; question and answer rewritten by SelfMadeQuant.com.

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