Ch04 Probability

Business Statistics, 4e, by Ken Black. 2003 John Wiley & Sons.
4-1
Business Statistics, 4e
by Ken Black
Chapter 4
Probability
A LOTTERY IS A
TAX ON PEOPLE
WHO DON'T
UNDERSTAND
STATISTICS!!
Discrete Distributions
4-2
Learning Objectives
Comprehend the different ways of assigning
probability.
Understand and apply marginal, union,
joint, and conditional probabilities.
Select the appropriate law of probability to
use in solving problems.
Solve problems using the laws of
probability including the laws of addition,
multiplication and conditional probability
Revise probabilities using Bayes rule.
4-3
Methods of Assigning Probabilities
Applications: chances of having break downs,
defective items, customer visits in an hour of a
day, life insurance claims, accidents, employees
attrition, life of a mechanical part; companys
hiring practices meeting govt. criteria; managing
risk; regulators examining whether criteria is met.
Classical method of assigning probability (rules
and laws)
Relative frequency of occurrence (cumulated
historical data)
Subjective Probability (personal intuition or
reasoning)
4-4
Classical Probability
Method of assigning
probability based on laws:
involves a random experiment,
outcomes, events. Probability
can be determined even before
the experiment.
Number of outcomes leading
to the event divided by the
total number of outcomes
possible
Each outcome is equally likely
Applicable to games of chance
Objective -- everyone correctly
using the method assigns an
identical probability
P E
N
Where
N
e
n
( )
:
!
!
!
total number o outcomes
number o outcomes in E
e
n
4-5
Relative Frequency Probability
Based on historical
data
Computed after
performing the
experiment
Number of times an
event occurred divided
by the number of trials
Objective -- everyone
correctly using the
method assigns an
identical probability
P E
N
Where
N
e
n
( )
:
=
=
=
total number of trials
number of outcomes
producing
e n
4-6
Subjective Probability
Comes from a persons intuition or reasoning
Subjective -- different individuals may assign
different numeric probabilities to the same
event (farmer, oil price, success of a rural
marketing campaign)
egree of belief (probability that a CEO will
be kidnapped by an unhappy employee/
terrorist, chances of strike by trade, manager
of a casino business will not pay tax, )
Useful for unique (single-trial) experiments
New product introduction
Initial public offering of common stock
Site selection decisions
Sporting events
4-7
Structure of Probability
Experiment: random check on quality of a
product, interviewing 30 customers for their
satisfaction with a gadget (tossing coin 2x, a die)
Event: an outcome or collective outcomes (even#)
Elementary Events: event impossible to break
down into other events
Sample Space: list of all possible outcomes
Unions and Intersections
Mutually Exclusive Events
Independent Events
Collectively Exhaustive Events
Complementary Events
4-8
Experiment
Experiment: a process that produces outcomes
More than one possible outcome
Exs: interview randomly selected 20 managers on
acquiring tech, selecting 50 radars for their
efficiency; testing side effect of a drug
Trial: one repetition of the process
Elementary Event: cannot be decomposed or
broken down into other events (outcome)
Event: an outcome of an experiment
may be an elementary event, or
may be an aggregate of elementary events
usually represented by an uppercase letter, e.g.,
A, E
1
4-9
An Example Experiment
Experiment: randomly select, without
replacement, two families from the residents of
Tiny Town
Elementary Event: the
sample includes families
A and C
Event: each family in
the sample has children
in the household
Event: the sample
families own a total of
four automobiles
Family
Children in
Household
Number of
Automobiles
A
B
C
D
Yes
Yes
No
Yes
3
2
1
2
Tiny Town Population
4-10
Sample Space
The set of all elementary events for an
experiment
Methods for describing a sample space
roster or listing
tree diagram
set builder notation
Venn diagram
4-11
Sample Space: Roster Example
Experiment: randomly select, without
replacement, two families from the residents of
Tiny Town
Each ordered pair in the sample space is an
elementary event, for example -- (D,C)
Family
Children in
Household
Number of
Automobiles
A
B
C
D
Yes
Yes
No
Yes
3
2
1
2
Listing of Sample Space
(A,B), (A,C), (A,D),
(B,A), (B,C), (B,D),
(C,A), (C,B), (C,D),
(D,A), (D,B), (D,C)
4-12
Sample Space: Tree Diagram for
Random Sample of Two Families
A
B
C
D
D
B
C
D
A
C
D
A
B
C
A
B
4-13
Sample Space: Set Notation for
Random Sample of Two Families
S = {(x,y) | x is the family selected on the
first draw, and y is the family selected on
the second draw}
Concise description of large sample spaces
4-14
Sample Space
Useful for discussion of general principles
and concepts
Listing of Sample Space
(A,B), (A,C), (A,D),
(B,A), (B,C), (B,D),
(C,A), (C,B), (C,D),
(D,A), (D,B), (D,C)
Venn Diagram
4-15
Union of Sets
The union of two sets contains an instance
of each element of the two sets.
,
,
,
X
Y
X Y
!
!
!
1479
23456
12345679
, , ,
, , , ,
, , , , , , ,
,
,
,
C IBM DEC Apple
F Apple Grape Lime
C F IBM DEC Apple Grape Lime
=
=
=
, ,
, ,
, , , ,
Y
X
4-16
Intersection of Sets
The intersection of two sets contains only
those element common to the two sets.
,
,
,
X
Y
X Y
=
=
=
1 4 7 9
2 3 4 5 6
4
, , ,
, , , ,
,
,
,
C IBM DEC Apple
F Apple Grape Lime
C F Apple
=
=
=
, ,
, ,
Y
X
4-17
Mutually Exclusive Events
Events with no
common outcomes
Occurrence of one
event precludes the
occurrence of the
other event
,
,
,
X
Y
X Y
!
!
!
1 7 9
2 3 4 5 6
, ,
, , , ,
,
,
,
C IBM DEC Apple
rape i e
C F
!
!
!
, ,
,
Y X
P X Y ( ) !0
4-18
Independent Events
Occurrence of one event does not affect the
occurrence or nonoccurrence of the other
event
The conditional probability of X given Y is
equal to the marginal probability of X.
The conditional probability of Y given X is
equal to the marginal probability of Y.
) ( ) | ( X P Y X P =
Prob of X when Y is known is same as when Y is unknown
Means Y doesnt affect probability of X.
4-19
Collectively Exhaustive Events
Contains all elementary events for an
experiment
E
1
E
2
E
3
Sample Space with three
collectively exhaustive events
4-20
Complementary Events
All elementary events not in the event A
are in its complementary event.
Sample
Space
A
P Sa pleSpace ( ) !1
P A P A ( ) ( ) d= 1
d A
4-21
Four Types of Probability
Marginal Probability
Union Probability
Joint Probability
Conditional Probability
4-22
Four Types of Probability
Marginal
The probability
of X occurring
Union
The probability
of X or Y
occurring
Joint
The probability
of X and Y
occurring
Conditional
The probability
of X occurring
given that Y
has occurred
Y
X
Y
X
Y
X
P X ( )
P X Y ( )
P X Y ( )
P X Y ( | )
4-23
General Law of Addition
four laws of probability to solve prob problems: addition, conditional,
multiplication and Bayes rule; no one rule but some rules easier than others
P X Y P X P Y P X Y ( ) ( ) ( ) ( ) = +
Y
X
Example
In a survey of interior design workers were
asked which changes in office design would
increase productivity. No 1 change voted by
70% involved reducing noise, 67% said
more storage and filing space. If one worker
is selected randomly what is the prob that
this person would select reducing noise or
more filing space if 56% said that both
would improve productivity?
4-24
4-25
General Law of Addition -- Example
P N S P N P S P N S ( ) ( ) ( ) ( ) = +
S
N
.56
.67 .70
P N
P S
P N S
P N S
( ) .
( ) .
( ) .
( ) . . .
.
=
=
=
= +
=
7 0
6 7
5 6
7 0 6 7 5 6
0 8 1
4-26
Office Design Problem
Probability Matrix
.11
.19
.30
.56 .14 .70
.67 .33 1.00
Increase
Storage Space
Yes No Total
Yes
No
Total
Noise
Reduction
4-27
Probability Matrix
.11
.19
.30
.56 .14 .70
.67 .33 1.00
Increase
Storage Space
Yes No Total
Yes
No
Total
Noise
Reduction
P N S P N P S P N S ( ) ( ) ( ) ( )
. . .
.
= +
= +
=
70 67 56
81
4-28
Probability Matrix
.11
.19
.30
.56 .14 .70
.67 .33 1.00
Increase
Storage Space
Yes No Total
Yes
No
Total
Noise
Reduction
P N S ( ) . . .
.
= + +
=
56 14 11
81
4-29
Venn Diagram of the X or Y
but not Both Case
Y
X
P(X or Y but not both) = P(X)+P(Y)-P(XY)-P(XY)
= P(XUY) P(XY)
4-30
The Neither/Nor Region
Y
X
P X Y P X Y ( ) ( ) = 1
4-31
The Neither/Nor Region
S
N
P N S P N S ( ) ( )
.
.
=
=
=
1
1 81
19
4-32
Special Law of Addition
If X and Y are mutually exclusive,
P X Y P X P Y ( ) ( ) ( ) = +
X
Y
Mutually Exclusive
Are mutually exclusive events independent?
A firm interested in increasing its workers
productivity surveyed by asking which one
of the following factor needs improving:
Improve safety (S) 21%
Improve cafeteria food (F) 28%
Improve communication skills(C) 8%
Improve supervision(M) 12%
Improve room conditions(R) 15%
Improve quality of equipments(E) 16%
What are P(S U F) and P(SF)?
4-33
4-34
Law of Conditional Probability
The conditional probability of X given Y is
the joint probability of X and Y divided by
the marginal probability of Y.
P X Y
P X Y
P Y
P Y X P X
P Y
( )
( )
( )
( ) ( )
( )
!
4-35
Probability Matrix
What is the P(S/N)?
.11
.19
.30
.56 .14 .70
.67 .33 1.00
Increase
Storage Space
Yes (S) No Total
Yes (N)
No
Total
Noise
Reduction
4-36
Law of Conditional Probability
N
S
.56
.70
P N
P N S
P S N
P N S
P N
( ) .
( ) .
( )
( )
( )
.
.
.
!
!
!
!
!
7 0
5 6
5 6
7 0
8 0
Example: Raw values
4-37
Male Female
Managerial(G) 8 3 11
Professional(P) 31 13 44
Technical(T) 52 17 69
Clerical(C) 9 22 31
100 55 155
A company reveals that 155 employees worked in one of
4 positions as shown below with their gender in columns.
If an employee is selected randomly, what is the probability
that the employee is female or a professional worker?
P(F/G)? P(T/M)? P(T and M)?
Multiplication Laws
4-38
General law of multiplication has to do with joint
probability:
P(XY) = P(X)P(Y/X) = P(Y) P(X/Y)
Multiplication Rule
4-39
Use the following table to develop General Law of
Multiplication as well as conditional probability
Male (M) Female(F)
Managerial (G) 0.052 0.019
0.071
Professional(P) 0.2 0.084
0.284
Technical (T) 0.335 0.110
0.445
Clerical(C) 0.058 0.142
0.2
0.645 0.355
What is P(F/G)? 0.019/0.071=0.27 =P(FG)/P(G)
What is P(T/M)? 0.335/0.645=0.52=P(TM)/P(M)
P(TM) = P(T/M) P(M)
4-40
Law of Multiplication
Demonstration Problem 4.5
P X Y P X P Y X P Y P X Y ( ) ( ) ( ) ( ) ( ) ! !
Married
Yes No
Supervisor Yes
16 14 30
No
64 46 110
80 60 140
A company has 140 employees of which 30 are
supervisors. Eighty are married, and 20% of the
married employees are supervisors.
4-41
Law of Multiplication
Total
.7857
Yes No
.4571 .3286
.1143 .1000 .2143
.5714 .4286 1.00
Married
Yes
No
Total
Supervisor
Probability Matrix
of Employees
20 . 0 ) (
5714 . 0
140
80
) (
2143 . 0
140
30
) (
!
! !
! !
M S P
M P
S P
P M S P M P S M ( ) ( ) ( )
( . )( . ) .
!
! ! 0 5714 0 20 0 1143
P M S P M P M S
P M S P S P M S
P M P M
( ) ( ) ( )
. . .
( ) ( ) ( )
. . .
( ) ( )
. .
=
= =
=
= =
=
= =
0 5714 0 1143 0 4571
0 2143 0 1143 0 1000
1
1 0 5714 0 4286
P S P S
P M S P S P M S
( ) ( )
. .
( ) ( ) ( )
. . .
=
= =
=
= =
1
1 0 2143 0 7857
0 7857 0 4571 0 3286
4-42
Special Law of Multiplication
for Independent Events
General Law
Special Law
P X Y P X P Y X P Y P X Y ( ) ( ) ( ) ( ) ( ) ! !
I events and are independent,
and P X P X Y P Y P Y X
Consequently
P X Y P X P Y
( ) ( ), ( ) ( ).
,
( ) ( ) ( )
! !
!
4-43
164 .
67 .
11 .
) (
) (
) (
!
!
!
S P
S N P
S N P
.19
.30
.14 .70
.33 1.00
Increase
Storage Space
Yes No Total
Yes
No
Total
Noise
Reduction
.11
.56
.67
Reduced Sample
Space for
Increase
Storage Space
= Yes
4-44
Independent Events
If X and Y are independent events, the
occurrence of Y does not affect the
probability of X occurring.
If X and Y are independent events, the
occurrence of X does not affect the
probability of Y occurring.
If X and Y are independent events,
, and P X Y P X
P Y X P Y
( | ) ( )
( | ) ( ).
=
=
Demonstration problem 4.2
Probability matrix is given below from a
national survey of 200 executives who were
asked to identify the geographic location of
their company and their companys industry
type.
4-45
4-46
Independent Events
Geographic Location
Northeast
D
Southeast
E
Midwest
F
West
G
Finance A .12 .05 .04 .07 .28
Manufacturing B .15 .03 .11 .06 .35
Communications C .14 .09 .06 .08 .37
.41 .17 .21 .21 1.00
P A G
P A G
P G
P A
P A G P A
( | )
( )
( )
.
.
. ( ) .
( | ) . ( ) .
=
= = =
= = =
007
021
033 028
033 028

Example : Independence
115.5 mill civilians of a countrys labour force is
shown below by age and employment status.
What is P (U|Y)? Is unemployment independent of age?
Write joint distribution that will make them
independent.
13.6%,no
4-47
Age
Y (young,
under 25)
O (older, 25
and over)
E(employed)
20.4 86.8 107.2
U (unemployed) 3.2 5.1 8.3
23.6 91.9 115.5
4-48
Y O
E 0.177 0.751 0.928
U 0.028 0.044 0.072
0.205 0.795 1.00
4-49
Exercise
48% of all bachelors degrees are obtained by women &
17.5% of all bachelors degrees are in business. 4.7% of all
bachelors degrees go to women majoring in business. Are the
events bachelors degree holder is a woman and bachelor
degrees in business statistically significant?
Ans: P(A)P(B)=0.084 =/ P(A & B)
If 90% of all PCs of a particular model will operate for at
least a year before requiring repair. A manager purchases 3 of
these computers. What is the probability that all 3 will work
for 1 year before any repair is needed?
Ans: 0.729
4-50
Only a Bayesian Statistician is able
to coherently explain the statement:
If there is a 50-50 chance that
something can go wrong, then 9
times out of ten it will.
Bayes Theorem
Total Probability & Bayes Theorem
4-51
Bayes theorem allows to evaluate probabilities that are

difficult to obtain
Law of total probability:
considering only two events X and Y.
Extension if X can be partitioned into n events, Law will
be:
Ex: If Y= event that a picture card is drawn from a deck. X
1
, X
2
, X
3
, X
4
are events that denote card drawn is a heart,
diamond, spade , club respectively.
P(Y) = P(YX
1
)+P(YX
2
)+P(YX
3
)+P(YX
4
) = 16/52
X) P(Y X) P(Y P(Y) + =
=
=
n
i 1
i
) X P(Y P(Y)
Total Probability & Bayes Law
4-52
Express total probability in terms of conditional probabilities
Bayes rule is a formula that uses the law of conditional probabilities
to allow revision of original probability with arrival of new
information.
=
= =
n
1 i
i i
n
1 i
i
) P(X ) X | P(Y ) X P(Y P(Y)
... ) X | Y ( P ) X ( P ) X | Y ( P ) X ( P
) X | Y ( P ) X ( P
P(Y)
Y) P(X
) Y | P(X
2 2 1 1
i i i
i
+ +
=
=
4-53
Revision of Probabilities: Bayes Rule
An extension to the conditional law of
probabilities
Enables revision of original probabilities
with new information
P X Y
P Y X P X
P Y X P X P Y X P X P Y X P X
i
i i
n n
( | )
( | ) ( )
( | ) ( ) ( | ) ( ) ( | ) ( )
=
+ + 1 1 2 2
Example: Bayes Rule
4-54
Two companies, Alamo Ribbon and South Jersey produce a
type of ribbon. Let Alamo produce 65% and South Jersey
35% of the total market. 8% of the ribbons produced by
Alamo are defective whereas 12% of South Jerseys are
defective. A customer purchases a new ribbon. What are the
probabilities that Alamo produced the ribbon? South Jersey?
The ribbon is tested and found defective. Now what is the
probability that Alamo produced the ribbon? That south
jersey produced the ribbon?
Notice the new information that ribbon purchased is
defective changes the probability.
4-55
Answer:
Out of 100, A sales 65 and S sales 35.
Out of 100, A produces 5.2 and S produces 4.2 defectives
Out of 100 total defectives= 9.4
If 1 defective is observed probability it is due to A is
then 5.2/9.4 =0.55
If 1 defective is observed probability it is due to B is then
4.2/9.4 =0.45
4-56
Revision of Probabilities
with Bayes' Rule: Ribbon Problem
P Ala o
P SouthJersey
P d Ala o
P d SouthJersey
P Ala o d
P d Ala o P Ala o
P d Ala o P Ala o P d SouthJersey P SouthJersey
P SouthJersey d
P d SouthJersey P SouthJersey
P d Ala o P Ala o P d SouthJersey P SouthJersey
( ) .
( ) .
( ) .
( ) .
( )
( ) ( )
( ) ( ) ( ) ( )
( . )( . )
( . )( . ) ( . )( . )
.
( )
( ) ( )
( ) ( ) ( ) ( )
( . )( . )
( .
!
!
!
!
!
!
!

!
0 65
0 35
0 08
0 12
0 08 0 65
0 08 0 65 0 12 0 35
0 553
0 12 0 35
0 08)( . ) ( . )( . )
.
0 65 0 12 0 35
0 447
!
4-57
with Bayes Rule: Ribbon Problem
Conditional
Probability
0.052
0.042
0.094
0.65
0.35
0.08
0.12
0.052
0.094
=0.553
0.042
0.094
=0.447
Alamo
South Jersey
Event
Prior
Probability
P Ei ( )
Joint
Probability
P E d i ( )
Revised
Probability
P E d i ( | )
P d
E
i
( |
)
4-58
with Bayes' Rule: Ribbon Problem
Alamo
0.65
South
Jersey
0.35
Defective
0.08
Defective
0.12
Acceptable
0.92
Acceptable
0.88
0.052
0.042
+ 0.094
Homework Exercise
#4.26 (p. 125) #4.33 (p.130) # 4.45 (p.135)
#4.51(p.136) [due on Aug 3]. This is a group
assignment for 5-individual group. (submission
to be done in clearly hand-written paper.) A
randomly chosen individual will present some
of the exercises in front of the class)
Case study for group Colgate-Palmolive
makes a total effort (this is also due on Aug3;
first group from each section -the group of ten-
will introduce the case including the answers
for presentation in the class. Two randomly
chosen students will present the case. Case is in
the textbook at the end of chp 4). All works will
be assessed.
4-59

Ch04 Probability

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Ch04 Probability

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Bayes theorem allows to evaluate probabilities that are

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