Probability Fundamentals

Learning Outcomes
• What is Probability?
• How to remove uncertainties in business
decision making?
 What is Probability?
• deals with calculating the likelihood of a given
event's occurrence,
• is expressed as a number between 1 and 0
 Probability
•Probability is the likelihood
1 Certain
that the event will occur.
• Two Conditions:
•Value is between 0 and 1.
• Sum of the probabilities of .5
all events must be 1.

0 Impossible
 Random experiment
• A process of obtaining information through
observation or measurement of a phenomenon
whose outcome is subject to chance.
• Tossing a coin and observing the face that
appears.
• Testing a product to determine whether it is
defective or an acceptable product.
• To check petrol mileage of an automobile.
• Measuring daily rainfall, and so on.
 Sample space
• The set of all possible outcomes or simple
events of an experiment.
• no two or more of these outcomes can occur
simultaneously;
• exactly one of the outcomes must occur,
whenever the experiment is performed.
 Example
• Consider the experiment of tossing two coins.
The four possible outcomes are the following
sample events.
• The sample space is S = {E1, E2, E3, E4}
• E1 = HH
• E2 =HT
• E3 = TH
• E4= TT
 Sample Spaces
Collection of all Possible Outcomes
e.g. All 6 faces of a dice:

e.g. All 52 cards of a bridge deck:

 Event Types
• A single possible outcome (or result) of an
experiment is called a simple (or elementary)
event.
• Mutually exclusive events
• Collectively Exhaustive Events

• Mutually exclusive events:

• Events which cannot occur together or
simultaneously.
• Example : H or T in toss of a coin
• Collectively Exhaustive Events
• A list of events is said to be collectively
exhaustive when all possible events that can
occur from an experiment includes every
possible outcome. That is, two or more events
are said to be collectively exhaustive if one of
the events must occur.
• Example : Rolling a dice
• sample space S = {1, 2, 3, 4, 5, 6}.
 Independent and Dependent Events
• Independent Events
• if information about one tells nothing about the
occurrence of the other. In other words, outcome
of one event does not affect the other event.
• Example : The outcomes of successive tosses of a
coin are independent of its preceding outcomes.

Contd.
• Dependent Events
• dependent if information about one tells
something about the other.
• Example : drawing of a card (say a queen)
from a pack of playing cards without
replacement reduces the chances of drawing
a queen in the subsequent draws
 Definition of Probability

• Three Approaches :
• Classical
• Relative Frequency
• Subjective
 Classical Approach
• Based on the assumption that all the possible outcomes
(finite in number) of an experiment are mutually
exclusive and equally likely.

• Example : Rolling a Dice

• there are six equally likely exhaustive events, each will
occur 1/6 of the time, and therefore the probability of
any one event occurring is 1/6
 Relative Frequency Approach

• Compute using empirical data.

• The probability of an event A is the ratio of the
number of times that A has occurred in n trails
of an experiment.

• Example: Sales forecast for the next year

based on previous year sales forecast.
 Subjective approach
• based on the degree of beliefs, judgement,
and experience concerning the likelihood of
occurrence of a random event.
• a way to quantify an individual's beliefs,
assessment, and judgment about a random
phenomenon.

• Example: Analyst predicts inflation will

increase by 10% over next year.
 Fundamental Rules of Probability

• Each probability should fall between 0 and 1, i.e.

0 ≤ P(Ai) ≤ 1, for all i, where P(Ai) is read as:
‘probability of event Ai
• Probability of the number seven occurring, on
rolling a dice, P(7) = 0, because this number is an
impossible event for this experiment.
• Probability of the number 3 occurring, on rolling
a dice, P(3) = 1/6,

Contd.
• P(S) = P(A1) + P(A2) +…+ P(An) = 1, where P(S) is
read as: ‘probability of the certain event’. This
rule states that the sum of probabilities of all
simple events constituting the sample space is
equal to one.

• P(Ā) = 1 – P(A), that is, the probability of an event

that does not occur is equal to one minus the
probability of the event that does occur
 How To Determine Number Of Outcomes?

 Counting rule :
 If an experiment is performed in k stages with n1
ways to accomplish the first stage, n2 ways to
accomplish the second stage and so on then the
number of ways to accomplish the experiment is
 n1 × n2 ×…× nk.
 Example : Tossing of three coins can be is a three-
step experiment .
 So there are 2 × 2 × 2 = 8 possible outcomes.

 HHH, TTT, HTH, HTT, TTH, HHT, THT, THH.

 Combinations
 Combinations allows us to select r (say) number
of outcomes from a collection of n distinct
outcomes without caring in what order they are
arranged.

 nC =
r n!
 r!(n! – r!)
 notation ! means factorial,
 for example, 4! = 4 × 3 × 2 × 1 = 24
 Example : Two balls are drawn out of packet
containing 10 balls. In how many ways can two
balls be drawn
 Permutations

• Permutations helps us to compute the

number of ways in which n distinct objects can
be arranged, taking r of them at a time.

• nP
r = n!
• (n! – r!)
 RULES OF PROBABILITY

• Rules of Addition
• when we have two events and are interested
in knowing the probability that at least one of
the events occurs.
• If events A and B are mutually exclusive, then
the probability of either event A or B or both
occurring is equal to the sum of their
individual probabilities.

• P(A) or P(B) = P(A) + P(B)

• Example : Consider the pattern of arrival of customers
at a service counter during first hour it is open along
with its probability:

No. of 0 1 2 3 4 or more
Persons
Probability 0.1 .2 0.3 0.3 0.1

• Find the probability that either 2 or 3 persons

will be there during the first hour.
• P(2 or 3) = P(2) + P(3) = 0.3 + 0.3 = 0.6
 Partially Overlapping (or Joint) Events

P(A) or P(B) = P(A) + P(B) – P(A and B)

P(A U B) = P(A) + P(B) – P(A ∩ B)

 Example : 70 % students in a class will pass the
maths test and 60 % will pass the science test.
Around 50% will pass both the tests. The
probability that the students will pass either maths
or science.
• Practice Questions:
• What is the probability that a randomly chosen
card from a deck of cards will be either a king or
a heart.
• From a sales force of 150 persons, one will be
selected to attend a special sales meeting. If 52
of them are unmarried, 72 are college graduates,
and 3/4 of the 52 that are unmarried are college
graduates, find the probability that the sales
person selected at random will be neither single
nor a college graduate.