Past exam of the mathematics course of the University of Cambridge / 2010 / iii / Paper 38 / 4 / b

Set $h=\mathbb{E}\theta >0$ and $w=\mathrm{Var}(\theta )>0$. Keeping $h$ fixed in the gamma distribution family gives $\alpha =h^2/w$ and $\lambda =h/w$. The ratio of expected process variance to variance of hypothetical means becomesAs the prior variance $w$ decreases, $K$ increases, so the credibility factor decreases. In the limit $w\downarrow 0$, $Z\downarrow 0$: the risk parameter is already essentially known from the prior, leaving little need to use the noisy sample mean. The population claim expected value $h/(k-1)$ remains fixed throughout this comparison.