Probability

Learning Objectives
Concepts: Events, Sample Space, Intersection & Union Tools: Venn Diagram, Tree Diagram, Contingency Table Probability, Conditional Probability, Addition Rule & Multiplication Rule Use Bayes Theorem Summarize the Rules of Permutation and Combination

Basic Concepts
Random Experiment is a doing something that render to at least two possible outcomes with uncertainty as to which will occur. y A coin is thrown y A consumer is asked which of two products he or she prefers y The daily change in an index of stock market prices is observed

Sample Spaces
Collection of all possible outcomes e.g.: All six faces of a die:

e.g.: All 52 cards

a deck of bridge cards

Events and Sample Spaces

An event is a set of basic outcomes from the sample space, and it is said to occur if the random experiment gives rise to one of its constituent basic outcomes.
Simple Event Outcome With 1 Characteristic Joint Event 2 Events Occurring Simultaneously Compound Event One or Another Event Occurring

Simple Event
A: Male B: Over age 20 C: Has 3 credit cards D: Red card from a deck of cards E: Ace card from a deck of cards

Joint Event
D and E, (DE) : Red, ace card from a deck A and B, (AB): Male, over age 20 among a group of survey respondents

Intersection
Let A and B be two events in the sample space S. Their intersection, denoted AB, is the set of all basic outcomes in S that belong to both A and B. Hence, the intersection AB occurs if and only if both A and B occur. If the events A and B have no common basic outcomes, their intersection AB is said to be the empty set or null set.

Compound Event
Ace or Red card from deck of cards

Union
Let A and B be two events in the sample space S. Their union, denoted AB, is the set of all basic outcomes in S that belong to at least one of these two events. Hence, the union AB occurs if and only if either A or B or both occurs

Event Properties
Mutually Exclusive
Two outcomes that cannot occur at the same time E.g. flip a coin, resulting in head and tail

Collectively Exhaustive
One outcome in sample space must occur E.g. Male or Female

Special Events
Null Event
Club & Diamond on 1 Card Draw
Null Event

ii

Complement of Event
For Event A, All Events Not In A: A' or A

What is Probability?
1.Numerical measure of 1 likelihood that the event will occur
Simple Event Joint Event Compound .5
Certain

2.Lies between 0 & 1 3.Sum of events is 1

0
Impossible

Concept of Probability
A Priori classical probability, the probability of success is based on prior knowledge of the process involved. i.e. the chance of picking a black card from a deck of bridge cards Empirical classical probability, the outcomes are based on observed data, not on prior knowledge of a process. i.e. the chance that individual selected at random from the BID employee survey if satisfied with his or her job.

Concept of Probability
Subjective probability, the chance of occurrence assigned to an event by a particular individual, based on his/her experience, personal opinion and analysis of a particular situation. i.e. The chance of a newly designed style of
mobile phone will be successful in market.

Computing Probabilities
The probability of an event E:

number of event outcomes P( E ) ! total number of possible outcomes in the sample space X ! T

e.g. P(

) = 2/36

(There are 2 ways to get one 6 and the other 4) Each of the outcomes in the sample space is equally likely to occur

Presenting Probability & Sample Space

1. Listing
S = {Head, Tail}

2. Venn Diagram 3. Tree Diagram 4. Contingency Table

Venn Diagram
Example:Survey on Job Satisfation Event: A = Satisfied, = Dissatisfied

A
S
P(A) = 356/400 = .89, P( ) = 44/400 = .11

Tree Diagram
Example:Employee Survey
Joint Probability

Satisfied Employee
P(A)=.89

Not Satisfied
P( )=.11

Advanced (.545) Not Advanced (.455) Advanced (.318) Not Advanced (.682)

.485 .405 .035 .075

Joint Probability Using Contingency Table

Event
Event

B1

B2

Total

A1 A2 Total

P(A1 B1) P(A1 B2) P(A1) P(A2 B1) P(A2 B2) P(A2) P(B1) P(B2) 1

Joint Probability

Marginal (Simple) Probability

Joint Probability Using Contingency Table

Employee Survey
Joint Probability

Satisfied Advanced Not Advanced Total .485 .405 .89

Not

Satisfied .035 .075 .11

Total .52 .48 1.00

Simple Probability

Use of Venn Diagram

Let E1, E2,, Ek be K mutually exclusive and collective exhaustive events, and let A be some other event. Then the K events E1 A, E2 A, , Ek A are mutually exclusive, and their union is A. (E1 A) (E2 A) (Ek A) = A That is; sum of the joint probability is always marginal probability

Compound Probability Addition Rule

1. Used to Get Compound Probabilities for Union of Events 2. P(A or B) = P(A B) = P(A) + P(B)  P(A B)

3. For Mutually Exclusive Events: P(A or B) = P(A B) = P(A) + P(B) 4. Probability of Complement P(A) + P( ) = 1. So, P( ) = 1  P(A)

Addition Rule: Example

A hamburger chain found that 75% of all customers use mustard, 80% use ketchup, 65% use both. What is the probability that a particular customer will use at least one of these? A = Customers use mustard B = Customers use ketchup AB (AorB) = a particular customer will use at least one of these Given P(A) = .75, P(B) = .80, and P(AB) = .65, P(AB) = P(A) + P(B)  P(AB) = .75 + .80  .65= .90

Conditional Probability
1. Event Probability Given that Another Event Occurred 2. Revise Original Sample Space to Account for New Information Eliminates Certain Outcomes 3. P(A | B) = P(A and B) , P(B)>0 P(B)

Example
Recall the previous hamburger chain example, what is the probability that a ketchup user uses mustard? P(A|B) = P(AB)/P(B) = .65/.80 = .8125 Please pay attention to the difference from the joint event in wording of the question.

Conditional Probability
Draw a card, what is the probability of black ace? What is the probability of black ace when black happens?

Black

Event (Ace and Black)

Black Ace
(S)

Black Happens: Eliminates All Other Outcomes and Thus Increase the Conditional Probability

Conditional Probability Using Contingency Table

Conditional Event: Draw 1 Card. Note Black Ace
Color Type Ace Non-Ace Total
Red Black Revised Sample Space

2 24 26

2 24 26

Total 4 48 52

P(Ace and Black) 2/52 = 2/26 P(Ace|Black) = = P(Black) 26/52

Statistical Independence
1. Event Occurrence Does Not Affect Probability of Another Event e.g. Toss 1 Coin Twice, Throw 3 Dice 2. Tests For Independence P(A | B) = P(A), or P(B | A) = P(B), or P(A and B) = P(A)P(B)

Statistical Independence
Employee Survey Note: (.52)(.89) = .4628 { .485 Satisfied Advanced Not Advanced Total P(A1and B1) .485 .405 .89 P(A1)
Not

Satisfied .035 .075 .11 P(B1)

Total .52 .48 1.00

Multiplication Rule
1. Used to Get Joint Probabilities for Intersection of Events (Joint Events) 2. P(A and B) = P(A B) P(A B) = P(A)P(B|A) = P(B)P(A|B) For dep.event 3. For Independent Events: P(A and B) = P(AB) = P(A)P(B)

Bayes Theorem
1. Permits Revising Old Probabilities Based on New Information 2. Application of Conditional Probability 3. Mutually Exclusive Events
Prior Probability New Information Apply Bayes' Theorem Revised Probability

Bayes Theorem Formula

P(A | Bi ) P(Bi ) P(Bi | A) = P(A | B1) P(B1) + P(A | Bk ) P(Bk ) P(Bi A) ! P(A)
Same Event

Bayess Theorem Example

Fifty percent of borrowers repaid their loans. Out of those who repaid, 40% had a college degree. Ten percent of those who defaulted had a college degree. What is the probability that a randomly selected borrower who has a college degree will repay the loan?

B1= repay, B2= default, A=college degree P(B1) = .5, P(A|B1) = .4, P(A|B2) = .1, P(B1|A) =? P( A | B1 ) P ( B1 ) P( B1 | A) ! P( A | B1 ) P( B1 )  P ( A | B2 ) P( B2 ) (.4)(.5) .2 ! ! ! .8 (.4)(.5)  (.1)(.5) .25

Bayes Theorem Example Table Solution

Event Bi B1 B2 Prior Prob P(Bi) .5 X .5 1.0
Repay Default

Cond. Joint Prob Prob P(A|Bi) P(Bi A) .4 .1 = .20 .05

Post. Prob P(Bi |A) .20/.25 = .8 .05/.25 = .2 1.0

P(A) = 0.25

P(College)