Computing Conditional

Probabilities
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 or simple probability of A
P(B) = marginal or simple probability of B
Statistics for Managers using Microsoft Excel 7e Copyright 2014 Pearson Education, Inc. Chap 4-1
 Independence
Two events are independent if and only
if:

P(A | B) P(A)
Events A and B are independent when the probability
of one event is not affected by the fact that the other
event has occurred

Statistics for Managers using Microsoft Excel 7e Copyright 2014 Pearson Education, Inc. Chap 4-2
 Multiplication Rules

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)

Statistics for Managers using Microsoft Excel 7e Copyright 2014 Pearson Education, Inc. Chap 4-3
 Marginal Probability

Marginal probability for event A:

P(A) P(A | B1)P(B1) P(A | B2 )P(B2 ) P(A | Bk )P(Bk )

Where B1, B2, , Bk are k mutually exclusive and

collectively exhaustive events

Statistics for Managers using Microsoft Excel 7e Copyright 2014 Pearson Education, Inc. Chap 4-4
 Bayes Theorem

Bayes Theorem is used to revise previously

calculated probabilities based on new
information.

Developed by Thomas Bayes in the 18th

Century.

It is an extension of conditional probability.

Statistics for Managers using Microsoft Excel 7e Copyright 2014 Pearson Education, Inc. Chap 4-5
 Bayes Theorem

P(A | B i )P(B i )
P(B i | A)
P(A | B 1 )P(B 1 ) P(A | B 2 )P(B 2 ) P(A | B k )P(B k )

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

Statistics for Managers using Microsoft Excel 7e Copyright 2014 Pearson Education, Inc. Chap 4-6
 Bayes Theorem Example

A drilling company has estimated a 40%

chance of striking oil for their new well.
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.
Given that this well has been scheduled for a
detailed test, what is the probability
that the well will be successful?

Statistics for Managers using Microsoft Excel 7e Copyright 2014 Pearson Education, Inc. Chap 4-7
 Bayes Theorem Example
(continued)

Let S = successful well

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

Statistics for Managers using Microsoft Excel 7e Copyright 2014 Pearson Education, Inc. Chap 4-8
 Bayes Theorem Example
(continued)

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
Statistics for Managers using Microsoft Excel 7e Copyright 2014 Pearson Education, Inc. Chap 4-9
 Bayes Theorem Example
(continued)

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

Statistics for Managers using Microsoft Excel 7e Copyright 2014 Pearson Education, Inc. Chap 4-10
 Example of Bayes Theorem

M& R Electronic is considering marketing a

new model of television. In the past 40% of
new model televisions have been successful
and 60% have been failure. Before introducing
a the new model the marketing team conducts
an extensive study and releases the report. In
the past, 80% successful new models received
a favorable report and 30% of the unsuccessful
models received unsuccessful reports. For the
new model, the marketing team has issued a
favorable report, what is probability that it will
be successful.
Statistics for Managers using Microsoft Excel 7e Copyright 2014 Pearson Education, Inc. Chap 4-11
 P ( Model successful ) = 0.4, P ( not successful)
= 06.
P ( report favorable | model successful) =0.8
P ( report favorable | model not successful) =0.3
P( model successful | report favorable) =
P( RF| MS) P( MS)/ ( P( RF| MS) P( MS) +P(RF|MNS) P( MNS) )

= (0.8) ( 0.4)/ ( (0.8) )(0.4) + (0.3)(0.6) = 0.32/ ( 0.32 + 0.18) = 0.64

Statistics for Managers using Microsoft Excel 7e Copyright 2014 Pearson Education, Inc. Chap 4-12
 Bayes Theorem Problem
A Dubai based company is trying to decide
whether to bid for a major TV advertising contract.
In the past, the companys main competitor, based
in Abu Dhabi, has submitted bids 70 % of the
time. If the Abu Dhabi competitor does not bid on
the job, the probability that Dubai Media Company
will get the job is 0.50. If the Abu Dhabi competitor
bids on the job bids on the job, the probability the
Dubai based company will get the job is 0.25.
If the Dubai based company gets the job. What is
the prob. That Abu Dhabi company did not bid.
What is the probability that Dubai based company
will get the job.
Statistics for Managers using Microsoft Excel 7e Copyright 2014 Pearson Education, Inc.