Probability

Part 1

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 4-2
Important Terms

n Probability is the likelihood or chance of an event

occurring. Probability = the number of ways of achieving
success. The total number of possible outcomes
(always between 0 and 1)

n Event – Each possible type of occurrence or outcome

n Simple Event – an event that can be described by a

single characteristic

n Sample Space – the collection of all possible events

Assessing Probability

n There are three approaches to assessing the probability

of un uncertain event:
1. a priori classical probability
X number of ways the event can occur
probabilit y of occurrence  
T total number of elementary outcomes

2. empirical classical probability

number of favorable outcomes observed
probabilit y of occurrence 
total number of outcomes observed

3. subjective probability
an individual judgment or opinion about the probability of occurrence
Sample Space
I n p r o b a b i l i t y t h e o r y, t h e s a m p l e s p a c e ( a l s o
called sample description space or possibility space) of
an experiment or random trial is the set of all possible
outcomes or results of that experiment. e.g. All 6 faces
of a dice:

e.g. All 52 cards of a bridge deck:

Events
n Simple event
n An outcome from a sample space with one
characteristic
n e.g., A red card from a deck of cards
n Complement of an event A (denoted A’)
n All outcomes that are not part of event A
n e.g., All cards that are not diamonds
n Joint event
n Involves two or more characteristics
simultaneously
n e.g., An ace that is also red from a deck of cards
Visualizing Events

n Contingency Tables
Ace Not Ace Total

Black 2 24 26
Red 2 24 26

Total 4 48 52

Sample
n Tree Diagrams 2
Sample
Ace Space

k Card
Blac
Space
Full Deck Not an Ace 24
of 52 Cards Ace
Red C 2
ar d
Not an
Ace 24
Mutually Exclusive Events
n Mutually exclusive is a statistical term describing two or
more events that cannot coincide. It is commonly used to
describe a situation where the occurrence of one
outcome supersedes the other.
example:

A = Queen of diamonds; B = Queen of clubs

n Events A and B are Mutually Exclusive

Collectively Exhaustive Events
n Collectively exhaustive events
n One of the events must occur
n The set of events covers the entire sample space

example:
A = Aces; B = Black cards;
C = Diamonds; D = Hearts

n Events A, B, C and D are collectively exhaustive

(but not mutually exclusive – an ace may also be
a heart)
n Events B, C and D are collectively exhaustive and
also mutually exclusive
Intersections versus Unions
• Intersections - “Both/And”
- The intersection of A and B and C
is also written A  .B  C
- All events or characteristics occur
simultaneously for all elements
contained in an intersection.
• Unions - “Either/Or”
- The union of A or B or C is also
written AU BU C.

- At least one of a number of possible

events occur at the same time.
Venn Diagram

A’ A B A B
A

A’ AB AB

A B A A
B B

AB0 AB=0 AB

Probability
n Probability is the numerical measure
of the likelihood that an event will 1.0 Certain
occur
n The probability of any event must be
between 0 and 1, inclusively
0 ≤ P(A) ≤ 1 For any event A 0.5
n The sum of the probabilities of all
mutually exclusive and collectively
exhaustive events is 1
P(A)  P(B)  P(C)  1
If A, B, and C are mutually exclusive and 0.0 Impossible
collectively exhaustive
Probability
Example:

Throughout her teaching career, Professor David has

awarded 186 A’s out of 1,200 students. What is the
probability that a student in her section this semester
will receive an A?

n To find the probability a selected student earned an

A:

186
P ( A)   0.155
1,200
Part 2

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 4-14
Three Kinds of Probabilities

• Simple or marginal probability

- The probability that a single given event will
occur. The typical expression is P(A).
• Joint or compound probability
- The probability that two or more events occur.
The typical expression is P(A∩B).
• Conditional probability
- The probability that an event, A, occurs given
that another event, B, has already happened.
The typical expression is P(A|B).
Computing Joint and Marginal Probabilities

n The probability of a joint event, A and B:

number of outcomes satisfying A and B
P( A and B) 
total number of elementary outcomes

n Computing a marginal (or simple) probability:

P(A)  P(A and B1 )  P(A and B 2 )    P(A and Bk )

n Where B1, B2, …, Bk are k mutually exclusive and collectively
exhaustive events
Joint Probability Example

P(Red and Ace)

number of cards that are red and ace 2
 
total number of cards 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
Marginal Probability Example

P(Ace)
2 2 4
 P( Ace and Re d)  P( Ace and Black )   
52 52 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
Joint Probabilities Using Contingency Table

Event
Event B1 B2 Total
A1 P(A1 and B1) P(A1 and B2) P(A1)
A2 P(A2 and B1) P(A2 and B2) P(A2)

Total P(B1) P(B2) 1

Joint Probabilities Marginal (Simple) Probabilities

General Addition Rule

General Addition Rule:

P(A or B) = P(A) + P(B) - P(A ∩ B)

If A and B are mutually exclusive, then

P(A and B) = 0, so the rule can be simplified:

P(A or B) = P(A) + P(B)

For mutually exclusive events A and B
General Addition Rule Example

P(Red or Ace) = P(Red) +P(Ace) - P(Red and Ace)

= 26/52 + 4/52 - 2/52 = 28/52

Don’t count
the two red
Color aces twice!
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
Computing Conditional Probabilities
n A conditional probability is the probability of one
event, given that another event has occurred:
P(A and B) The conditional
P(A | B)  probability of A given
P(B) that B has occurred

P(A and B) The conditional

P(B | A)  probability of B given
P(A) that A has occurred

Where P(A and B) = joint probability of A and B

P(A) = marginal probability of A
P(B) = marginal probability of B
Conditional Probability Example

n Of the cars on a used car lot, 70% have air

conditioning (AC) and 40% have a CD player
(CD). 20% of the cars have both.

n What is the probability that a car has a CD

player, given that it has AC ?

i.e., we want to find P(CD | AC)

Conditional Probability Example
(continued)
n Of the cars on a used car lot, 70% have air conditioning
(AC) and 40% have a CD player (CD).
20% of the cars have both.
CD No CD Total
AC 0.2 0.5 0.7
No AC 0.2 0.1 0.3
Total 0.4 0.6 1.0

P(CD and AC) 0.2

P(CD | AC)    0.2857
P(AC) 0.7
Conditional Probability Example
n Given AC, we only consider the top row (70% of the cars). Of these,
20% have a CD player. 20% of 70% is about 28.57%.

CD No CD Total
AC 0.2 0.5 0.7
No AC 0.2 0.1 0.3
Total 0.4 0.6 1.0

P(CD and AC) 0.2

P(CD | AC)    0.2857
P(AC) 0.7
Using Decision Trees
.2
D .7 P(AC and CD) = 0.2
Given AC or Has
C
no AC: .7
C)= Doe
P(A s
have not .5
P(AC and CD’) = 0.5
AC CD
s
Ha .7
All
Cars
Do .2
e
hav s not .3
eA P(A CD P(AC’ and CD) = 0.2
C Has
C’)
= .3
Doe
s
have not .1 P(AC’ and CD’) = 0.1
CD
.3
Using Decision Trees
.2
.4 P(CD and AC) = 0.2
Given CD or Has
AC
no CD: .4
D)= Doe
P(C s
have not .2 P(CD and AC’) = 0.2
CD AC
s
Ha .4
All
Cars
Do .5
e
hav s not .6
eC AC P(CD’ and AC) = 0.5
D P(C Has
D’)
= .6
Doe
s
have not .1 P(CD’ and AC’) = 0.1
AC
.6
Statistical Independence

n Two events are independent if and only

if:

P(A | B)  P(A)
n Events A and B are independent when the probability
of one event is not affected by the other event
Multiplication Rules

n Multiplication rule for two events A and B:

P(A and B)  P(A | B) P(B)

Note: If A and B are independent, then P(A | B)  P(A)

and the multiplication rule simplifies to

P(A and B)  P(A) P(B)

When Events Are Dependent

• Events are dependent when the occurrence

of one event does change the probability
that another event will occur.
- If A and B are dependent, P(A|B)  P(A)
because the occurrence of event B does
change the probability that A will occur.
- If A and B are dependent, then
P(A and B) = P(A) • P(B|A)
Part 3

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 4-31
Bayes’ Theorem for the
Revision of Probability
• In the 1700s, Thomas Bayes developed a
way to revise the probability that a first
event occurred from information obtained
from a second event.
• Bayes’ Theorem: For two events A and B
P( A| B)  P( A and B)
P(B)
 P( A)P(B| A)
[P( A)P(B| A)]  [P( A')P(B| A')]
Bayes’ Theorem

P(A | Bi )P(Bi )
P(Bi | A) 
P(A | B1)P(B1)  P(A | B2 )P(B2 )    P(A | Bk )P(Bk )

n where:
Bi = ith event of k mutually exclusive and collectively
exhaustive events
A = new event that might impact P(Bi)
Bayes’ Theorem Example

n A drilling company has estimated a 40% chance of

striking oil for their new well.
n A detailed test has been scheduled for more
information. Historically, 60% of successful wells have
had detailed tests, and 20% of unsuccessful wells
have had detailed tests.
n Given that this well has been scheduled for a detailed
test, what is the probability
that the well will be successful?
Bayes’ Theorem Example

n Let S = successful well

U = unsuccessful well
n P(S) = 0.4 , P(U) = 0.6 (prior probabilities)
n Define the detailed test event as D
n Conditional probabilities:
P(D|S) = 0.6 P(D|U) = 0.2
n Goal is to find P(S|D)
Bayes’ Theorem Example

Apply Bayes’ Theorem:

P(D | S)P(S)
P(S | D) 
P(D | S)P(S)  P(D | U)P(U)
(0.6)(0.4)

(0.6)(0.4)  (0.2)(0.6)
0.24
  0.667
0.24  0.12

So the revised probability of success, given that this well

has been scheduled for a detailed test, is 0.667
Bayes’ Theorem Example

n Given the detailed test, the revised probability

of a successful well has risen to 0.667 from
the original estimate of 0.4

Prior Conditional Joint Revised

Event
Prob. Prob. Prob. Prob.
S (successful) 0.4 0.6 0.4*0.6 =0 .24 0.24/0.36 =
0.667
U (unsuccessful) 0.6 0.2 0.6*0.2 = 0.12 0.12/0.36 =
0.333
Sum = 0.36
Bayes’ Theorem
Example:

Cola Company recently received several

complaints that their bottles are under-filled. A
complaint was received today but the production
manager is unable to identify which of the two
Springfield plants (A or B) filled this bottle. What
is the probability that the under-filled bottle came
from plant A?
Bayes’ Theorem

The following table summarizes the Cola production

experience:

% of total % of under-filled
Plant
production bottle
A 5.5 3.0

B 4.5 4.0
Bayes’ Theorem

The probability that the under-filled bottle came from

plant A:

P ( A) P (U | A)
P( A | U ) 
P ( A) P (U | A)  P ( B ) P (U | B )
0.055(0.03)
  0.4783
0.055(0.03)  0.045(0.04)
The likelihood the bottle was filled in plant A is reduced
from 0.55 to 0.4783.
Counting
Example:

A roadside hawker sells four types of food: nasi lemak,

roti canai, fried rice and fried noodles, while the drinks
available are tea, coffee and Milo. If a student can buy
any combination of one type of food and one type of
drink, how many different combinations can he choose?

The choice of one out of four for food and a choice of

one out of three for drinks, thus giving a total of 4  3
= 12 possible combinations.
More Counting
• Permutations: The number of different ways n
objects can be arranged taken r at a time. Order is
important.
P(n, r)  n!
(n–r)!
• Combinations: The number of ways n objects can
be arranged taken r at a time. Order is not
important. n 

C(n,r)     n!

r 
  r!(n – r)!
Permutation
Example:

If we need to form 3 letters from the following

alphabets :
A, B, C, D, E, F, G
How many ways to form the 3 letters if every
alphabets can only be used once?

The total number of ways:

7 7!
P3   210
(7 - 3)!
Combination
Example:

If the university need to select 5 persons for the

student exchange program with a foreign university,
and there are 8 candidates eligible for the program.
Find the number of ways this can be done.

The total number of ways:

8 8!
C5   56
5 !3!