Probability Concepts

Basic Statement on
Probability
Probability is part of our daily lives. Consider some
of the following statements
- The price of equity shares of company X is
expected to increase
- It is likely to rain heavily

Probability is the chance that a particular

event will occur.

Basic Terminology in
Probability
Experiment: An activity that results in one and
only one outcome out of a set of disjoint
outcomes, where an outcome cannot be predicted
with certainty
Events: The possible outcomes of an experiment
are known as events
Sample Space: It is the set of all possible
outcomes of an experiment

Relative Frequency
Approach
Based on statistical data
Here, probability is defined as the
proportion of times an event occurs in
the long run when the conditions are
stable
Alternatively, probability is defined as
the observed relative frequency of an
event in a very large number of events

Classical Approach to
Probability
Probability can be mathematically
represented as
Number of times event occurs
P(event )
Total number of occrances

Probability for an event A can be

P ( A) the probability
of event A happening
represent
as

Example
Demand for sandwiches at a Fast Food
Corner has always been either 50,100,
150, 200, or 250 per day. Over the past
200 days, the frequencies of demand are
Demand
No. oftable:
days
represented
in the following
50

40

100

80

150

50

200

20

250

10
Total

200

Example

Demand

Frequency

Probability

50

40

=40/200 = 0.2

100

80

=80/200 = 0.4

150

50

=50/200 = 0.25

200

20

=20/200 = 0.1

250

10

=10/200 = 0.05

Total Probability

Probability Axioms
Each event must have associated with it a
probability greater than or equal to zero but
less than or equal to 1

0 P( A) 1

The probability of entire sample is 1

P( S ) 1

The probability of an event that does not

occur is equal to 1 minus probability of the
event that occurs
P( A) 1 P( A)

Types of Events
Mutually exclusive
Events are said to be mutually exclusive if only one of
the
events can occur on any one trial.
Example: a fair coin toss results in either a heads or a tails.

Collectively Exhaustive
Events are said to be collectively exhaustive if their
union
cover all the events within the entire sample
space
Example: a collectively exhaustive list of possible outcomes for a
fair coin toss includes heads and tails.

Law of Addition
Mutually Exclusive Events
P (A or B) = P (A) + P (B)
Example:
P (cricket or hockey) = P (hockey) + P (cricket)
50

50

Cricket

Hockey

100

Law of Addition
Not Mutually Exclusive
Events
P(A or B) = P(A)+P(B) - P(A and B)
Example:
P (cricket or hockey) = P (hockey) + P (cricket) P
(cricket and hockey)
40
Cricket

40
C&H
10

Hockey

100

Example
Specialized University offers four different graduate
degrees: business, education, accounting, and science.
Enrollment figures show 25 of their graduate students
are in each specialty. Although 50 of the students are
female, only 15 are female business majors. If a student
is randomly selected from the Universitys registration
database:
What is the probability the student is a business or education major?

What is the probability the student is a female or a business major?

Example
The probability that the student is a business or education
major is mutually exclusive event. Thus:
P(Bus or Edu) = P(Bus) + P(Edu)
= .25 + .25
= .50
The probability that the student is a female or a business
major is not mutually exclusive because the student could
be a female business major. Thus:
P(Fem or Bus) = P(Fem) + P(Bus) P(Fem and Bus)
= .50 + .25 - .15 = .60

Dependency
Events are either
statistically independent (the
occurrence of one event has no effect on
the probability of occurrence of the other),
or
statistically dependent (the occurrence
of one event gives information about the
occurrence of the other).

Probabilities :
Independent Events
Marginal probability: the probability of an
event occurring:
P(A)
Joint probability: the probability of multiple,
independent events, occurring at the same time:
P(AB) = P(A)*P(B)

Probabilities :
Independent Events
Conditional probability (for independent
events):
the probability of event B given that event A
has occurred:
P(B|A) = P(B)
or, the probability of event A given that event
B has occurred:
P(A|B) = P(A)

Independent Event
Example
A bag contains
3 black balls
and 7 green
balls. We
draw a ball
from the
bucket,
replace it, and
draw a second
ball.

P(black ball drawn on first draw)

P(B) =
(marginal probability)
P(two green balls drawn)
P(GG) =
(joint probability for two
independent events)

Independent Event
Example
A bag contains
3 black balls
and 7 green
balls. We
draw a ball
from the
bucket,
replace it, and
draw a second
ball.

P(black ball drawn on second

draw, first draw was green)
P(B|G) =
(conditional probability)
P(green ball drawn on second
draw, first draw was green)
P(G|G) =
(conditional probability)

Probabilities :
Dependent Events
Marginal probability: probability of an event occurring:
P(A)
Conditional probability :
The probability of event B given that event A has occurred:
P(B|A) = P(AB)/P(A)
The probability of event A given that event B has occurred:
P(A|B) = P(AB)/P(B)
Joint probability: The probability of
multiple events occurring at the same
time:
P(AB) = P(B|A)*P(A)

Dependent Event
Example
Assume that we
have an bag
containing 10 balls of
the following
descriptions:
4 are white (W) and
lettered (L)
2 are white (W) and
numbered (N)
3 are yellow (Y) and
lettered (L)
1 is yellow (Y) and
numbered (N)

Then:
P(WL) =
P(WN) =
P(W) =
P(YL) =
P(YN) =
P(Y) =

Dependent Event
Example
We have

Then:
P(Y) = 0.4

P(WL) = 0.4

- marginal probability

P(WN) = 0.2

P(L|Y) = P(YL)/P(Y)

P(W) = 0.6
P(YL) = 0.3
P(YN) = 0.1
P(Y) = 0.4

= 0.3/0.4 = 0.75
- conditional probability

P(W|L) = P(WL)/P(L)

= 0.4/0.7 = 0.57
conditional probability

Combination
A Combination is a way of selecting
several things out of a group
It is given by following formula
n

n!
Cr
r !(n r )!

Ex: How many combinations of 5 are

possible in a standard deck of cards.

Permutation
A permutation is an ordered combination
It is calculated by the following formula
n

n!
Pr
(n r )!

Ex: How many colour codes can be made

out of 4 flags of different colours.

Bayes Theorem
We can revise prior estimates of
probability using Bayes Theorem
Ex: Suppose there are two boxes B1
and B2. B1 contains 4 white balls and
1 black ball while B2 contains 1 white
ball and 4 black balls.

Bayes Theorem
Let there be an event A, which can
happen, only if one of the n mutually
events
Bexclusive
, B , B .......B
occur
P ( Bi ) P( A / Bi )
P( Bi / A)
P( Bi ) P( A / Bi )
1

3,

Bayes Theorem
Example
Three machines producing 40%, 35%
and 25% of the total output are known
to produce with defective proportion of
items as: 0.04, 0.06 and 0.03,
respectively. On a particular day, a unit
of output is selected at random, and is
found to be defective. What is the
probability that it was produced by the
second machine.

Bayes Theorem
Example
In a basin area where oil is likely to be found
underneath the surface, there are three locations
with three different types of earth compositions,
say C1, C2 and C3. The probabilities for these
three
compositions
are
0.5,0.3
and
0.2
respectively. Further it has been found from the
past experience that after drilling of well at these
locations, the probabilities of finding oil is 0.2, 0.4
and 0.3 respectively. Suppose, a well is drilled at a
location, and it yields oil, what is the probability
that the earth composition was C1.

Chebychevs Lemma
As per Chebychevs Lemma, SD helps to
find out the percentage of population lying
within limits from the mean of the variable
For any set of data, and for any constant
k>1, at least (1-1/k2) of the observations
must lie within k s.ds on either side of the
mean

Chebychevs Lemma
The probability that a random variable will lie
with in k s.ds of its mean is at least (1-1/k 2)

1
P ( x k x x k ) 1 2
Ex: Let the average number of marksk
obtained by students in an examination be
60% and s.d. of their marks be 5%. Then find
what percentage of students have scores
between
mean 2 s.d .

Probability/Statisti
cal Distributions

Random Variables
A variable is a quantity which changes or
varies due to any factor
A variable is called as random variable
when there is a chance factor associated
with it
The set of all possible values of random
variable and their associate probabilities
is called as probability distribution

Probability
Distribution
Ex: Let x be the number of breakdowns in machinery
of a factory in a given week. The probability
distribution for x can be given as follows

No. of
breakdowns (x)

P(x)

0.12

0.2

0.25

0.3

0.13

Expected Value of
Random Variable
The expected value of a random
variable is the weighted average of
all possible values that this random
variable can take on
The weights used in computing this
average correspond to the
E ( x) x P ( x)
probabilities

Example of Expected
Value
An accountant of a company is hoping to
receive payment from two outstanding
accounts during the current month. He
estimates that there is 0.6 probability of
receiving Rs.15,000/- due from A and
0.75 probability of receiving Rs.40,000/due from B. What is the expected cash
flow from these two accounts.

Binomial Distribution
Visualise a practical situation where a trial
results in only two outcomes, say Success
and Failure. Further the result of one trial
does not influence the result of next trial, and
the probability of success at each trail is same.
Tossing a coin -

Head or Tail

Inspection of an item Defective or Non-defective

Repayment by a borrower Regular or not

Binomial Distribution
The conditions for the applicability of
Binomial Distribution are
(a) There are n independent trials
(b) Each trial has only two possible outcomes
(c) The probabilities of two outcomes remain
constant

Binomial Distribution
If x is the random variable
representing number of
successes, the probability of
getting r successes and (n-r)
failures, in n trials,
n is given
r n r by the
P ( x function
r ) Cr p q
probability
Mean np
Std .Dev npq

Binomial Distribution
Ex: Spectrum light bulb company went on for mass
production of colour bulbs before Diwali. Five bulbs,
one of each colour, were packed in each of the boxes
which were to be sold as a unit. Due to shortage of
time, quality was compromised, and it was estimated
that 20% of the bulbs were defective.
If a customer purchases such a box of bulbs, what is
the probability that the box will have
(a)
(b)
(c)
(d)
(e)

No defective bulb
2 defective bulbs
At least one defective bulb
At most one defective bulb
All defective bulbs

Using Binomial Tables

Ex: Seven coins are tossed
simultaneously. Using binomial
distribution find out the probability of
obtaining at least five heads.

Poisson Distribution
Distribution of rare events
The event whose probability of
occurrence is very small but the
number of trials which could lead to the
occurrence of the event are very large
So for a large n but very small p such
that their product is m=np, the Poisson
distribution is defined
x as
m

me
P( x)
x!

e 2.718

Poisson Distribution
Ex: Suppose, we have a production
process of some item that is
manufactured in large quantities. We
find that, in general, the proportion of
defective items is p=0.01. A random
sample of 100 items is selected. What
is the probability that there are 2
defective items in this sample.

Poisson Distribution
Ex: Suppose the probability of dialing
a wrong number is 0.05. Then, what
is the probability of dialing exactly 3
wrong numbers in 100 dials.

Normal Distribution
Distribution for continuous random
variable
Many real life situations can be applicable
to Normal Distribution
Characteristics of Normal Distribution are
Mean is located at the centre of the
distribution
Curve is symmetrical around mean
Mean = Median = Mode

Normal Distribution
The probability density function of a
random variable X with
1
P( x)
e
2

1/ 2( x m ) 2

Standard Normal
Distribution
The units for standard normal
distribution curve are denoted by z
and are called as z values or z score.
Z gives distance from mean in terms
of SD

xm
z

Properties of Normal
Distribution

Normal Distribution
Example
Following is the data for life of bulbs
manufactured by a company.
Mean = 1600 hrs
S.D. = 30 hrs
(a)What is the probability that the life of a bulb
selected at random will be less than or equal
to a certain value less than the mean, say
1550 hrs?
(b)What is the proportion or percentage of bulbs
having life less than or equal to 1660 hrs?

Normal Distribution
Example
(c) What is the probability that the life of a
bulb selected at random will be between
1550 and 1580 hrs ?
(d) What is the probability that the life of a
bulb selected at random will be between
1630 and 1680 hrs ?
(e) What is the probability that the life of a
bulb selected at random will be between
1550 and 1630 hrs?

Skewness
Skewness is a measure of the
asymmetry of the probability
distribution