Managerial Decisions

under
Uncertainty
-----------------------------
 Question 1
A Project Manager’s Dilemma:
A Project Manager want to know whether the project he has
undertaken will finish on time or not. He has historical data on
projects that have been carried out within the organisation. On
analysing the data, the Project Manager finds that 60% of all
projects finished on time. He also found that 50% of historical
projects gone through major scope of changes, where 30% of
projects having on-time finish records undergone at least one
major scope of change. So what will be his conclusion
regarding the on-time finish of new project given that the
project will go through a major change?
 Question 2
Detections of Disease from Medical Tests:
If HIV has a prevalence of 3% in San Francisco,
and a particular HIV test has a false positive rate
of .001 and a false negative rate of .01, what is
the chance that a random person who tests
positive is actually infected (also known as
“positive predictive value”)?
 Question 3
Forecasting Election Results:
Suppose in 2019 General Election there will be three candidates
namely Mr. Nationalist, Mr. Silence and Mr. Prince fight for
Prime Ministership in a country. The chances of their win is
4:2:3 respectively. The chance that Mr. Nationalist, if selected the
economy will further decline is 0.3 whereas the Mr. Silence and
Mr. Prince if selected the economy will improve is 0.5 and 0.2.
then,
- What is the chance that the economy will boom in 2019?
- If the economy is decline in 2019, what is the chance that Mr.
Price is the PM?
Hint to the Solutions:
http://fivethirtyeight.com

The 18th Century British Nate Silver, the In-Game basket Ball
Mathematician. Analyser predicted accurately in
2008 and 2012 US Presidential
election where he was correct in 49
seats out of 50 in 2008 and 50 out
of 50 seats in 2012.
Source: Wikipedia.
Probability Revision using Bayes’ Theorem

Application of
Prior New Posterior
Bayes’
Probabilities Information Probabilities
Theorem

𝐿𝑖𝑘𝑒𝑙𝑖ℎ𝑜𝑜𝑑 × 𝑃𝑟𝑖𝑜𝑟 𝑃𝑟𝑜𝑏

𝑃𝑜𝑠𝑡𝑒𝑟𝑖𝑜𝑟 𝑃𝑟𝑜𝑏 =
𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑃𝑟𝑜𝑏

Where,
Prior Probability: the probability of the events initially estimated or given
Likelihood: Probability that indicates how likely an event occurs given that a prior event
already happened
Posterior: Probability that is estimated after the experiment with new information
Marginal Probability : total probability under the respective conditions.
Theorem 1:
If 𝐸1 , 𝐸2 , … 𝐸𝑛 are mutually disjoint events with 𝑃 𝐸𝑖 ≠ 0,then for any arbitrary event
𝐴 ⊂ ‫=𝑖𝑛ڂ‬1 𝐸𝑖 such that 𝑃 𝐴 > 0 , we have,

𝑃 𝐸𝑖 𝑃 𝐴 𝐸𝑖
𝑃 𝐸𝑖 𝐴 =
σ𝑛
𝑖=1 𝑃 𝐸𝑖 𝑃 𝐴 𝐸𝑖

Theorem 2 (Bayes Theorem for future events):

The probability of materialization of another event C given that

𝑃 𝐶 𝐴 ∩ 𝐸1 ,𝑃 𝐶 𝐴 ∩ 𝐸2 … is already materialized is given by

σ𝑛𝑖=1 𝑃 𝐸𝑖 𝑃 𝐴 𝐸𝑖 𝑃 𝐶 𝐴 ∩ 𝐸𝑖
𝑃 𝐶𝐴 =
σ𝑛𝑖=1 𝑃 𝐸𝑖 𝑃 𝐴 𝐸𝑖
 Question 4
In a bolt factory machines A, B and C manufacture
25%,35%,& 40% of the total and similar outputs
respectively. Out of their outputs 5, 4, 2 percent ,
respectively are defective bolts. A bolt is drawn at
random from the product and is found to be defective.
What is the probability that it was manufactured from
machine A, B and C respectively?
 Question 5
In answering the end term examination (part A) which
is multiple choice test, a TSM student either knows the
answer or he guesses. Let p be the probability that he
knows the answer and (1-p) be the probability that he
guesses at the answer. Assuming that a student who
guesses at the answer will be correct with probability
0.25, where 4 is the number of multiple choice
alternatives. What is the probability that a student
knew the answer to a question given that he answered
it correctly.
 Example: L. S. Clothiers

A proposed shopping center will provide

strong competition for downtown
businesses like L. S. Clothiers. If the
shopping center is built, the owner of L. S.
Clothiers feels it would be best to relocate
to the shopping center.
The shopping center cannot be built unless a
zoning change is approved by the town council.
The planning board must first make a
recommendation, for or against the zoning
change, to the council.
Prior Probabilities

Let:
A1 = town council approves the zoning change
A2 = town council disapproves the change

Let it is given that:

P(A1) = .7, P(A2) = .3

 New Information

The planning board has recommended against

the zoning change. Let B denote the event of a
negative recommendation by the planning board.
Given that B has occurred, should L. S. Clothiers
revise the probabilities that the town council will
approve or disapprove the zoning change?
Conditional Probabilities

Past history with the planning board and the town

council indicates the following:

P(B|A1) = .2 P(B|A2) = .9

Hence: P(BC|A1) = .8 P(BC|A2) = .1

Tree Diagram

 Example: L. S. Clothiers

Town Council Planning Board Experimental

Outcomes

P(B|A1) = .2
P(A1  B) = .14
P(A1) = .7
c
P(B |A1) = .8 P(A1  Bc) = .56

P(B|A2) = .9
P(A2  B) = .27
P(A2) = .3
c
P(B |A2) = .1 P(A2  Bc) = .03
 Bayes’ Theorem
 To find the posterior probability that event Ai will
occur given that event B has occurred, we apply
Bayes’ theorem.

P( Ai )P( B| Ai )
P( Ai |B) 
P( A1 )P( B| A1 )  P( A2 )P( B| A2 )  ...  P( An )P( B| An )

 Bayes’ theorem is applicable when the events for

which we want to compute posterior probabilities
are mutually exclusive and their union is the entire
sample space.
 Posterior Probabilities
 Example: L. S. Clothiers
Given the planning board’s recommendation not
to approve the zoning change, we revise the prior
probabilities as follows:
P( A1 )P( B| A1 )
P( A1 |B) 
P( A1 )P( B| A1 )  P( A2 )P( B| A2 )
(. 7 )(. 2 )

(. 7 )(. 2 )  (. 3)(. 9)
= .34
Posterior Probabilities

 Example: L. S. Clothiers
The planning board’s recommendation is good
news for L. S. Clothiers. The posterior probability of
the town council approving the zoning change is .34
compared to a prior probability of .70.
Bayes’ Theorem: Tabular Approach
 Example: L. S. Clothiers
• Step 1
Prepare the following three columns:
Column 1 - The mutually exclusive events for
which posterior probabilities are desired.
Column 2 - The prior probabilities for the events.
Column 3 - The conditional probabilities of the
new information given each event.
Bayes’ Theorem: Tabular Approach
• Step 1
(1) (2) (3) (4) (5)
Prior Conditional
Events Probabilities Probabilities
Ai P(Ai) P(B|Ai)

A1 .7 .2
A2 .3 .9
1.0
Bayes’ Theorem: Tabular Approach
• Step 2
Prepare the fourth column:
Column 4
Compute the joint probabilities for each event and
the new information B by using the multiplication
law.
Multiply the prior probabilities in column 2 by
the corresponding conditional probabilities in
column 3. That is, P(Ai IB) = P(Ai) P(B|Ai).
Bayes’ Theorem: Tabular Approach
 Example: L. S. Clothiers
• Step 2
(1) (2) (3) (4) (5)
Prior Conditional Joint
Events Probabilities Probabilities Probabilities
Ai P(Ai) P(B|Ai) P(Ai I B)

A1 .7 .2 .14
A2 .3 .9 .27
.7 x .2
1.0
Bayes’ Theorem: Tabular Approach

 Example: L. S. Clothiers
• Step 2 (continued)
We see that there is a .14 probability of the town
council approving the zoning change and a
negative recommendation by the planning board.
There is a .27 probability of the town council
disapproving the zoning change and a negative
recommendation by the planning board.
Bayes’ Theorem: Tabular Approach
 Example: L. S. Clothiers
– Step 3
Sum the joint probabilities in Column 4. The
sum is the probability of the new information,
P(B). The sum .14 + .27 shows an overall
probability of .41 of a negative recommendation
by the planning board.
Bayes’ Theorem: Tabular Approach
 Example: L. S. Clothiers
• Step 3
(1) (2) (3) (4) (5)
Prior Conditional Joint
Events Probabilities Probabilities Probabilities
Ai P(Ai) P(B|Ai) P(Ai I B)

A1 .7 .2 .14
A2 .3 .9 .27
1.0 P(B) = .41
Bayes’ Theorem: Tabular Approach
 Example: L. S. Clothiers
• Step 4
Prepare the fifth column:
Column 5
Compute the posterior probabilities using the
basic relationship of conditional probability.
P( Ai  B)
P( Ai | B) 
P( B)
The joint probabilities P(Ai I B) are in column 4
and the probability P(B) is the sum of column 4.
Bayes’ Theorem: Tabular Approach
 Example: L. S. Clothiers
• Step 4
(1) (2) (3) (4) (5)
Prior Conditional Joint Posterior
Events Probabilities Probabilities Probabilities Probabilities
Ai P(Ai) P(B|Ai) P(Ai I B) P(Ai |B)

A1 .7 .2 .14 .3415

A2 .3 .9 .27 .6585
1.0 P(B) = .41 1.0000
.14/.41
 Question 6
If HIV has a prevalence of 3% in San
Francisco, and a particular HIV test has a
false positive rate of .001 and a false
negative rate of .01, what is the probability
that a random person who tests positive is
actually infected (also known as “positive
predictive value”)?
 Answer: using probability tree
P(test +)=.99 P (+, test +)=.0297

P(+)=.03
P(test - = .01)
P(+, test -)=.003

P(test +) = .001
P(-, test +)=.00097
P(-)=.97

P(-, test -) = .96903

P(test -) = .999 ______________
1.0

A positive test places one on either of the two “test +” branches. But only the top
branch also fulfills the event “true infection.” Therefore, the probability of being
infected is the probability of being on the top branch given that you are on one of
the two circled branches above.
P(test  &true) .0297
P( / test )    96.8%
P(test ) .0297  .00097
 Answer: using Bayes’ rule

P(test  / true) P(true)

P(true  / test )  
P(test  / true) P(true)  P(test  / true-) P(true-)
.99(.03)
 96.8%
.99(.03)  .001(.97)