Chapter 4 Basic Probability

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc. Chap 4-1

Learning Objectives
In this chapter, you will learn:
Basic probability concepts

Conditional probability
To use Bayes Theorem to revise probabilities

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-2

Definitions
Probability: the chance that an uncertain

event will occur (always between 0 and 1) Event: Each possible type of occurrence or outcome Simple Event: an event that can be described by a single characteristic Sample Space: the collection of all possible events
Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-3

Types of Probability
There are three approaches to assessing the probability of an uncertain event:
1. a priori classical probability: the probability of an event is based on prior knowledge of the process involved. 2. empirical classical probability: the probability of an event is based on observed data. 3. subjective probability: the probability of an event is determined by an individual, based on that persons past experience, personal opinion, and/or analysis of a particular situation.
Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-4

Calculating Probability
1. a priori classical probability
Probabilit y of Occurrence X number of ways the event can occur T total number of possible outcomes

2. empirical classical probability

Probabilit y of Occurrence number of favorable outcomesobserved total number of outcomesobserved

These equations assume all outcomes are equally likely.

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc. Chap 4-5

Example of a priori
classical probability
Find the probability of selecting a face card (Jack, Queen, or King) from a standard deck of 52 cards.
Probabilit y of Face Card X number of face cards T total number of cards

X 12 face cards 3 T 52 total cards 13

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-6

Example of empirical
classical probability
Find the probability of selecting a male taking statistics from the population described in the following table:
Taking Stats Male Female Total 84 76 160 Not Taking Stats 145 134 279 Total 229 210 439

Probabilit y of Male Taking Stats

number of males taking stats 84 0.191 total number of people 439

Chap 4-7

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Examples of Sample Space

The Sample Space is the collection of all possible events ex. All 6 faces of a die:

ex. All 52 cards in a deck of cards ex. All possible outcomes when having a child: Boy or Girl
Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-8

Events in Sample Space

Simple event An outcome from a sample space with one characteristic ex. A red card from a deck of cards Complement of an event A (denoted A/) All outcomes that are not part of event A ex. All cards that are not diamonds Joint event Involves two or more characteristics simultaneously ex. An ace that is also red from a deck of cards
Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-9

Visualizing Events in Sample Space

Contingency Tables:
Black Red Total

Ace
2 2 4

Not Ace
24 24 48

Total
26 26 52
2 24

Tree Diagrams:
Full Deck of 52 Cards

Sample Space

2
24
Chap 4-10

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Definitions Simple vs. Joint Probability

Simple (Marginal) Probability refers to the

probability of a simple event.

ex. P(King)

Joint Probability refers to the probability of an

occurrence of two or more events.

ex. P(King and Spade)

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-11

Definitions Mutually Exclusive Events

Mutually exclusive events are events that cannot

occur together (simultaneously).

example:
A = queen of diamonds; B = queen of clubs
Events A and B are mutually exclusive if only one card is

selected

example:
B = having a boy; G = having a girl
Events B and G are mutually exclusive if only one child is

born
Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-12

Definitions Collectively Exhaustive Events

Collectively exhaustive events
One of the events must occur The set of events covers the entire sample space

example:
A = aces; B = black cards; C = diamonds; D = hearts Events A, B, C and D are collectively exhaustive (but

not mutually exclusive a selected ace may also be a heart) Events B, C and D are collectively exhaustive and also mutually exclusive
Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-13

Computing Joint and Marginal Probabilities

The probability of a joint event, A and B:
P( A and B) number of outcomes satisfying A and B total number of elementary outcomes

Computing a marginal (or simple) probability:

P(A) P(A and B1 ) P(A and B2 ) P(A and Bk )

Where B1, B2, , Bk are k mutually exclusive and collectively exhaustive events

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-14

Example: Joint Probability

P(Red and Ace)
number of cards that are red and ace 2 total number of cards 52
Ace Not Ace Total

Black
Red Total

2
2 4

24
24 48

26
26 52
Chap 4-15

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Example: Marginal (Simple) Probability

P(Ace)
P( Ace and Re d) P( Ace and Black) 2 2 4 52 52 52

Ace Black Red Total 2 2 4

Not Ace 24 24 48

Total 26 26 52
Chap 4-16

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Joint Probability Using a Contingency Table

Event Event A1 A2 Total B1 P(A1 and B1) P(A2 and B1) P(B1) B2 P(A1 and B2) P(A2 and B2) P(B2) Total P(A1) P(A2) 1

Joint Probabilities

Marginal (Simple) Probabilities

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-17

Probability Summary So Far

Probability is the numerical measure of

the likelihood that an event will occur. between 0 and 1, inclusively 0 P(A) 1 for any event A.

Certain

The probability of any event must be

The sum of the probabilities of all

.5

mutually exclusive and collectively exhaustive events is 1. P(A) + P(B) + P(C) = 1 A, B, and C are mutually exclusive and collectively exhaustive

0
Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Impossible
Chap 4-18

General Addition Rule

General Addition Rule:
P(A or B) = P(A) + P(B) - P(A and B) If A and B are mutually exclusive, then P(A and B) = 0, so the rule can be simplified: P(A or B) = P(A) + P(B)

for mutually exclusive events A and B

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-19

General Addition Rule Example

Find the probability of selecting a male or a statistics student from the population described in the following table:
Taking Stats Male Female Total 84 76 160 Not Taking Stats 145 134 279 Total 229 210 439

P(Male or Stat) = P(M) + P(S) P(M or S) = 229/439 + 160/439 84/439 = 305/439

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc. Chap 4-20

Conditional Probability of one A conditional probability is the probability

event, given that another event has occurred:
P(A | B) P(A and B) P(B)
P(A and B) P(A)
The conditional probability of A given that B has occurred The conditional probability of B given that A has occurred

P(B | A)

Where P(A and B) = joint probability of A and B P(A) = marginal probability of A P(B) = marginal probability of B Statistics for Managers Using Microsoft Excel, 5e
2008 Pearson Prentice-Hall, Inc. Chap 4-21

Computing Conditional Probability

Of the cars on a used car lot, 70% have air

conditioning (AC) and 40% have a CD player (CD). 20% of the cars have both. What is the probability that a car has a CD player, given that it has AC ? We want to find P(CD | AC).

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-22

Computing Conditional Probability

CD AC No AC Total 0.2 0.2 0.4 No CD 0.5 0.1 0.6 Total 0.7 0.3 1.0

P(CD | AC)

P(CD and AC) .2 .2857 P(AC) .7

Given AC, we only consider the top row (70% of the cars). Of these, 20% have a CD player. 20% of 70% is about 28.57%.
Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-23

Computing Conditional Probability: Decision Trees

.2 .4

Given CD or no CD:
.2 .4
.5 .6

P(CD and AC) = .2

P(CD and AC/) = .2

All Cars

P(CD/ and AC) = .5

.1 .6 Statistics for Managers Using Microsoft Excel, 5e

2008 Pearson Prentice-Hall, Inc.

P(CD/ and AC/) = .1

Chap 4-24

Computing Conditional Probability: Decision Trees

.2 .7

Given AC or no AC:
.5 .7
.2 .3

P(AC and CD) = .2

P(AC and CD/) = .5

All Cars

P(AC/ and CD) = .2

.1 .3 Statistics for Managers Using Microsoft Excel, 5e

2008 Pearson Prentice-Hall, Inc.

P(AC/ and CD/) = .1

Chap 4-25

Statistical Independence
Two events are independent if and only if:

Events A and B are independent when the

P(A | B) P(A)

probability of one event is not affected by the other event

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-26

Multiplication Rules
Multiplication rule for two events A and B:

P(A and B) P(A | B) P(B)

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, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-27

Multiplication Rules
Suppose a city council is composed of 5

democrats, 4 republicans, and 3 independents. Find the probability of randomly selecting a democrat followed by an independent.

P(I and D) P(I | D) P(D) (3/11)(5/1 5/44 .114 2)

Note that after the democrat is selected (out of

12 people), there are only 11 people left in the sample space.

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-28

Marginal Probability Using Multiplication Rules

Marginal probability for event A:

Where B1, B2, , Bk are k mutually exclusive

P(A) P(A | B1 ) P(B1 ) P(A | B2 ) P(B 2 ) P(A | Bk ) P(B k )

and collectively exhaustive events

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-29

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, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-30

Bayes Theorem

where:
P(B | i event Bi =A) th P(A | B )P(B ofP(AP(A | )P(B ) ) P(Aexclusive and k| B B )P(B mutually | B )P(B ) ) collectively exhaustive events A = new event that might impact P(Bi)
i i i 1 1 2 2 k k

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-31

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, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-32

Bayes Theorem Example

Let S = successful well

U = unsuccessful well P(S) = .4 , P(U) = .6 (prior probabilities) Define the detailed test event as D Conditional probabilities:

P(D|S) = .6

P(D|U) = .2

Goal: To find P(S|D)

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-33

Bayes Theorem Example

Apply Bayes Theorem:
P(S | D) P(D | S)P(S) P(D | S)P(S) P(D | U)P(U)

(.6)(.4) (.6)(.4) (.2)(.6) .24 .667 .24 .12

So, the revised probability of success, given that this well has been scheduled for a detailed test, is .667
Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-34

Bayes Theorem Example

Given the detailed test, the revised probability of a

successful well has risen to .667 from the original estimate of 0.4.
Event S (successful) U (unsuccessful) Prior Prob. .4 .6 Conditional Prob. .6 .2 Joint Prob. .4*.6 = .24 .6*.2 = .12 Revised Prob. .24/.36 = .667 .12/.36 = .333

Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-35

Chapter Summary
In this chapter, we have
Discussed basic probability concepts. Sample spaces and events, contingency tables, simple

probability, and joint probability Examined basic probability rules. General addition rule, addition rule for mutually exclusive events, rule for collectively exhaustive events. Defined conditional probability. Statistical independence, marginal probability, decision trees, and the multiplication rule Discussed Bayes theorem.
Statistics for Managers Using Microsoft Excel, 5e 2008 Pearson Prentice-Hall, Inc.

Chap 4-36