Markov Analysis: Absorbing

States

MACALALAD, ALVIN JASON A.

Absorbing States
A system is said to be absorbed by a given

state, if once there, it cannot exit some other

state. Thus, if a system is in an absorbing
state, there is a zero probability of moving
from the state of any other state. Among the
numerous applications of absorbing states
are business situations dealing with the
analysis of accounts receivable.
Many businesses extend credit to customers.
Some customers pay their bill on time; others
pay late, while still others do not pay at all.
Uncollected accounts are often written off as

To find the probability of moving from a nonabsorbing state to each absorbing state, the
following procedures are applied.
1. Rearrange the transition matrix so that the absorbing

states are placed first.

2. Form three matrices using the entries of the
rearranged matrix. Call them I (the identify matrix
where the elements along the main diagonal from
upper left to lower right are 1, and all other elements
are 0), A (absorbing), and N (non-absorbing).
3. Construct the fundamental matrix F using the
formula
F = (I N)-1
Where the right side is the inverse of (I N).
4. Obtain another matrix B by multiplying F by A.
B = FA

The entries of B are the probabilities of moving

from the non-absorbing states to each
absorbing state.

Note:
1. The sum of the matrices A and B is defined only when

A and B have the same number of rows and the same

number of columns, that is, only when A and B are of
the same size. To obtain A + B. simply add the
corresponding entries of A and B. Similarly, to obtain A
B, subtract the corresponding entries.
2. If A is a matrix and c is a real number, then the scalar
multiple of A by c is cA. This is obtained by simply
multiplying each entry of A by c.
3. a

Example
A lending firm classifies its accounts as follows.
S1 = paid
S2 = current
S3 = overdue
S4 = bad debt
Past experience shows the following transition probabilities.

The accounts manager wans to know the probability that a current

account will be paid and the probability that an overdue account
will ultimately become a bed debt.

The absorbing states are S1 and S4; the non-absorbing

states are S2 and S3.

Step 1

Rearrange the transition matrix so that

the absorbing states are placed first.

The absorbing states are S1 and S4; the non-absorbing

states are S2 and S3.

Step 2
Form three matrices using the entries of the
rearranged matrix. Call them:
I (the identify matrix where the elements

along the main diagonal from upper left to

lower right are 1, and all other elements are
0),
A (absorbing), and
N (non-absorbing).

The absorbing states are S1 and S4; the non-absorbing

states are S2 and S3.

Step 2

The absorbing states are S1 and S4; the non-absorbing

states are S2 and S3.

Step 3
Construct the fundamental matrix F using the
formula
F = (I N)-1
Where the right side is the inverse of (I N).

The absorbing states are S1 and S4; the non-absorbing

states are S2 and S3.

Step 4
Obtain another matrix B by multiplying F by A.

B = FA

MATRIX B

The result shows that a system that starts from:

S2 has a 0.8 probability of being absorbed by S1
S2 has a 0.2 probability of being absorbed by S4
A system that starts from:
S3 has a 0.4 probability of being absorbed into S1
S3 has a 0.6 chance of being absorbed into S4

S1 = paid
S2 = current
S3 = overdue
S4 = bad debt
In the context of the problem, the result may be interpreted
as follows:
A current account has a 0.8 probability of being paid
A current account has a 0.2 probability of turning into a
bad debt
An overdue account has a 0.4 probability of being paid
An overdue account has a 0.6 probability of becoming a
bad debt

S1 = paid
S2 = current
S3 = overdue
S4 = bad debt
This is another interpretation:
80% of all the accounts presently classified as current
will be paid and 20% will become bad debts
40% of all the accounts in the overdue classification
will be paid and 60% will ultimately turn into bad
debts

Suppose P200,000 is presently in S2 (current) and P50,000

is in S3 (overdue). In the long run, how much does the firm
expect to be paid and how much does it expect to
become bad debts? The computations are shown below.

Hence, of the P 200,000 in S2, P160,000 will be paid and

P20,000 will become bad debt. Of the P50,000 in S3,
P20,000 will be paid and the remaining P30,000 will turn
into bad debt.

Thank
You