Amity MBA Chapter 5 Probability

Probability: Introduction
Introduction
• The study of Uncertainty
– Changes “I’m not sure …”
• to “I’m positive we’ll succeed … with probability 0.8”
– Can’t predict “for sure” what will happen next
• But can quantify the likelihood of what might happen
• And can predict percentages well over the long run
• Example: a 60% chance of rain
• e.g., success/failure of a new business venture
– Investment Problem
– Introducing a new product
– Stocking Decision
Sharad Kant Amity MBA QT 2

Terminology
An Event
• An event is one or more of the possible outcomes of
doing something.
– Examples of Event
1. Toss of a coin, and getting a tail would be an event.
2. From a pack of cards, drawing an ace of spade.
3. One student is selected from a class of 60 students

Terminology (Contd.)
Random Experiment
– A procedure that produces an outcome
• Not perfectly predictable in advance
– An activity that produces an event is referred in probability

theory as an Experiment
– Examples:
1. In a coin toss experiment, the occurrence of Head is an event.
2. In a card-drawing experiment, selection of a King is an event.

Terminology (Contd.)
Sample Space
– A list of all possible outcomes is called sample space
• Each random experiment has a sample space
– Examples Sample Space

• Toss of a coin {H, T}
• Toss of two coins {HH, HT, TH, TT}
• Toss of a Dice {1, 2, 3, 4, 5, 6}
• Toss of two Dice {11,12, … 21, 22, …, 61, ., 66}
• Selection of a student
from a class of 54 {List of all the 54 students}

Terminology (contd.)
• Probability of an Event e ns s
n
h app pp e
v e r s ha
ne a y
al w
– A number between 0 and 1
• The likelihood of occurrence of an event

Contingency Table
• It is way to present the sample space. It is a table of cross
classification.
Example: Contingency Table for Face-colour variable of a

playing card pack
Red Black Total

Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

Mutually Exclusive Events
• Events are said to be mutually exclusive if one and only one of them
can take place at a time.
• Example:
– Toss of a coin: either head or tail may turn up but not both. Head
and tail are mutually exclusive events
– Results of an examination: a student will either pass or fail but
not both. Pass and fail are mutually exclusive.

Collectively Exhaustive List
• When a list of the possible events that can result from an
experiment includes all possible outcomes, the list is called a
collectively exhaustive.
– Examples
• Toss of a coin: {H, T}
• Throw of a Dice: {1, 2, 3, 4, 5, 6}
• Result of a student {Pass, Fail}

Types of Probabilities
• Classical Probability
– From mathematical theory
– Make assumptions, draw conclusions
• Relative Frequency
– From data
– What percent of the time the event happened in the past
• Subjective Probability
– Anyone’s opinion, perhaps even without data or theory
– Bayesian analysis uses subjective probability with data

Classical Probability
• If all N possible outcomes in the sample space are

equally likely, then the probability of an event A is
Probability (A) = (# of outcomes where event A occurs) / N
Note: This probability is not a random number. The probability is

based on the entire sample space
Examples:
1. Suppose there are 35 defects in a production lot of 400.
Choose item at random.
Probability (defective) = 35/400 = 0.0875
2. Toss of a coin. Probability (heads) = 1/2

Relative Frequency
• From data: Run random experiment N times and see
how often an event happened
• (Relative Frequency of A) = (# of times A happened) / N
– Example:
12 flights, 9 were on time.
Relative frequency of the event “on time” is 9/12 = 0.75

Relative Frequency
Law of Large Numbers
– If N is large, then the relative frequency will be close
to the probability of an event
• Probability is FIXED.
• Relative frequency is RANDOM
Example:
Toss coin 20 times.
Probability of “heads” is 0.5
Relative frequency is 12/20 = 0.6 , or 9/20 = 0.45

Relative Frequency (contd.)
• Suppose event “Yes” has probability 0.25
• In N = 5 runs of random experiment
– Event happens: No, Yes, No, No, Yes
– Relative frequency of Yes is 2/5 = 0.4
• Graph of relative frequencies for n = 1 to 5
Relative frequency
0.5
0.0
1 2 3 4 5
Number n of times random experiment was run

Relative Frequency (contd.)
• As N gets larger
– Relative frequency gets closer to probability
• Graph of relative frequencies for N = 1 to 200
– Relative frequency approaches the probability
0.5
Relative frequency
Probability = 0.25
0
0 50 100 150 200
Number n of times random experiment was run

Subjective Probability
• Anyone’s opinion
– What do you think the chances are that the Indian economy will
have steady expansion in the near future?
– An economist’s answer
• Bayesian analysis
– Combines subjective probability with data to get results
• But subjective opinions (prior beliefs) can still play a background
role, even when they are not introduced as numbers into a
calculation, when they influence the choice of data and the
methodology (model) used

Exercises
1. From a pack of cards find the probabilities of the following
events
a) Drawing a card of spade
b) Drawing a King
c) Drawing a 9 of heart
d) Drawing a Red Queen
2. Random experiment of throwing two dice find the

probabilities of the following events:
a) Probability of total of both dice appearing (1)
b) Probability of total of both dice appearing (2)
c) Probability of total of both dice appearing (4)
d) Probability of total of both dice appearing (6)
e) Probability of total of both dice appearing (7)

Complement of an Event
• The event “not A” happens whenever A does not
• Venn diagram: A (in circle), “not A” (shaded)
not A
A A
• Prob(not A) = 1 – Prob(A)
– If Prob (Success) = 0.7, then Prob (Failure) = 1– 0.7 = 0.3

Union of Two Events
• Union happens whenever either (or both) happen
• Venn diagram: Union “A or B” (shaded) AυB
A B
– e.g., A = “get Amity job offer”, B = “get Professor job offer”

• Did the union happen? Congratulations! You have a job

Intersection of Two Events
• Intersection happens whenever both events happen
• Venn diagram: Intersection “A and B” (shaded) A∩B
A B
– e.g., A = “sign contract”, B = “get financing”

• Did the intersection happen? Great! Project has been
launched!

Relationship Between and and or
• Prob(A or B) = Prob (A) + Prob (B) – Prob (A and B)
= + –
• Prob (A and B) = Prob (A) + Prob (B) – Prob (A or B)

• Example: Customer purchases at appliance store
• Prob(Washer) = 0.20
• Prob(Dryer) = 0.25
• Prob(Washer and Dryer) = 0.15
– Then we must have
• Prob(Washer or Dryer) = 0.20 + 0.25 – 0.15 = 0.30

Conditional Probability
• Examples
– Prob (Success given Good results in test market) is Higher than

Prob (Success) evaluated before marketing study
– Prob (Get job given Poor interview) is Lower than Prob (Get job
given Good interview)

Conditional Probability (contd.)
• Given the extra information that B happens for sure, how must you
change the probability for A to correctly reflect this new knowledge?
Prob (A and B)
Prob (A given B) =
Prob (B)
– This is a (conditional) probability about A

– The event B gives information
• Unconditional
A B
– The probability of A
• Conditional
– A new universe, since B must happen
A and B B

Conditional Probability (contd.)
• Example: appliance store purchases
P (Washer) = 0.20
P (Dryer) = 0.25
P (Washer and Dryer) = 0.15
– Conditional probability of buying a Dryer given that they bought a

Washer
P (Dryer given Washer)
= P (Washer and Dryer) / P (Washer) = 0.15/0.20 = 0.75
75% of those buying a washer also bought a dryer
Watch the denominator!
– Conditional probability of Washer given Dryer
= P (Washer and Dryer) / P (Dryer) = 0.15/0.25 = 0.60
60% of those buying a dryer also bought a washer

Independent Events
• Two events are Independent if information about one does not change the
likelihood of the other
– Three equivalent ways to check independence
Prob (A given B) = Prob (A) d e n t, .

e p en t rue ck.
Prob (B given A) = Prob (B) If indthree arene to che
all any o
Prob (A and B) = Prob (A) × ProbUse (B)
e q u al
• Two events are Dependent if not independent Not
– Prob(Washer and Dryer) = 0.15
– Prob (Washer) × Prob (Dryer) = 0.20 × 0.25 = 0.05
– Washer and Dryer are not independent
• They are dependent
Mutually Exclusive Events
• Two events are Mutually Exclusive if they cannot both happen, that
is, if
Prob (A and B) = 0
• No overlap A B
in Venn diagram
• Examples
– Profit and Loss (for a selected business division)
– Green and Purple (for a manufactured product)
• Mutually exclusive events are dependent events

Additive Law of Probability
• The probability that at least one of the several mutually exclusive
events A1, A2, … , An will occur is the sum of the probability of the
occurrences of the individual events.
• P(A1υA2 υ … υ An) = P(A1) + P(A2)+ … + P(An)
• Example
• In a Horse race, the probabilities of winning horses are as follows:
Horse A winning = P(A) = 1/4

Horse B winning = P(B) = 1/5
Horse C winning = P(C) = 1/6
Horse D winning = P(D) = 1/7
– What is the probability of winning of at least one of them in the

race?

A.notB notA.B
AB
A B
P(A) = P(AB) + P(A.notB) P(B) = P(AB) + P(notA.B)
P(A + B) = P(A) + P(B) – P(AB)

Exercise
80 % of all the tourist who come to India will visit Delhi, 70%
of them will visit Mumbai and 60% of them will visit both
Delhi and Mumbai.
What is the Probability that a tourist coming to India will visit

Delhi or Mumbai or both.
What is the probability that he will visit neither city?

Exercise
Solution
80 % of all the tourist who come to India will visit Delhi, 70% of them
will visit Mumbai and 60% of them will visit both Delhi and Mumbai.
P(D) = 0.8 P(M) = 0.7 P(DM) = 0.6
Probability that a tourist will visit Delhi or Mumbai or both

= P(D + M)
= P(D) + P(M) – P(DM)
= 0.8 + 0.7 – 0.6
= 0.9
Probability that he will visit neither city = 1 – P(D + M) = 0.1

Permutations and Combinations
[
• n! = Factorial n = n( n − 1)(n − 2)...4.3.2.1 ]
• 0! = Factorial zero = 1
• Combinations: Selecting r items out of n when the order
in which these are selected in not important
n!
n
Cr =
r![ (n − r )!]
• Permutations: Selecting r items out of n when the order
in which these are selected makes the difference
n!
n
Pr = = n(n − 1)(n − 2)......(n − (r − 1))
(n − r )!

Probability Trees
A method for solving probability problems
• Given probabilities for some events (perhaps union, intersection, or
conditional)
– Find probabilities for other events
– Record the basic information on the tree
• Usually three probability numbers are given
– Perhaps two probability numbers if events are independent
• The tree helps guide your calculations
– Each column of circled probabilities adds up to 1
– Circled prob times conditional prob gives next probability
– For each group of branches
• Conditional probabilities add up to 1
• Circled probabilities at end add up to probability at start

Probability Tree (contd.)
• Shows probabilities and conditional probabilities
Event B
A)
Event A P(B given P(A and B)
Yes
P(A) No P(“not B”
s give n A)
Ye P(A and “not B”)
No
e n “ not A” ) P(“not A” and B)
P(B gi v
Yes
P(not A) No
P(“not A” and “not B”)

P(“not B”
gi ven “not A
”)

Example: Appliance Purchases
• First, record the basic information
• Prob(Washer) = 0.20, Prob(Dryer) = 0.25
• Prob(Washer and Dryer) = 0.15
Washer? Dryer?
Yes
0.15 add er)
hese (Dry
0.20 No T to P
Ye
s up .25
=0
No
Yes
No

Example (contd.)
• Next, subtract: 1 – 0.20 = 0.80, 0.25 – 0.15 = 0.10
Washer? Dryer?
Yes
0.15
e a dd r ye r )
h es ( D
0.20 No T to P
Ye
s up .25
=0
No
0.10
Yes
0.80 No

Example (contd.)
• Now subtract: 0.20 – 0.15 = 0.05, 0.80 – 0.10 = 0.70
Washer? Dryer?
0.15
Yes
0.20 No
s
Ye 0.05
No
0.10
Yes
0.80 No
0.70

Example (completed tree)
• Now divide to find conditional probabilities
0.15/0.20 = 0.75, 0.05/0.20 = 0.25
0.10/0.80 = 0.125, 0.70/0.80 = 0.875
Washer? Dryer?
0. 75 0.15
Yes
0.20 No 0.25
s
Ye 0.05
No
s 0. 125 0.10
Ye
0.80 No 0.87
5
0.70

Example (finding probabilities)
• Finding probabilities from the completed tree
P(Washer) = 0.20
Washer? Dryer?
P(Dryer) = 0.15+0.10 = 0.25
es 0.75 0.15
P(Washer and Dryer) = 0.15 Y
0.20 No 0.2
P(Washer or Dryer) = s 5
Ye 0.05
0.15+0.05+0.10 = 0.30
P(Washer and not Dryer) = 0.05 No
0 . 1 25 0.10
P(Dryer given Washer) = 0.75 Yes
0.80 No 0.87
P(Dryer given not Washer) = 0.125 5
0.70
P(Washer given Dryer) = 0.15/0.25 = 0.60
(using the conditional probability formula)

Exercise
• A business firm has invited applications for a managerial

post. The probability that an applicant has a
postgraduate qualification is 0.3 and that he has
adequate work experience is 0.7, and that he has both
the postgraduate qualification and work experience is
0.4. Assuming that 50 persons have applied for this
managerial post in the company, find out how many
applicants would have either a postgraduate degree or
adequate work experience.

Exercise - Solution
• Event A:
– Applicant has a postgraduate degree: P(A) = 0.3
• Event B:
– Applicant has an adequate work experience: P(B) = 0.7
• A and B are not mutually exclusive: P(A and B) = 0.4
• P(A or B) = P(A) + P(B) – P(A and B) = 0.3 + 0.7 – 0.4 = 0.6
• No. of applicants that have either a postgraduate degree or adequate

work experience = 0.6 x 50 = 30

Probabilities under conditions of
statistical Dependence
• Conditional Probability for Statistically
Dependent Events
P(B/A) = P(BA) / P(A)

Example / Exercise
• A box containing 10 balls as described below:
2 balls – Red and Dotted

1 ball – Green and Dotted
4 balls – Red and Striped
3 balls – Green and Stripped
1. What is the probability of drawing any particular ball from this box?
2. We draw a ball from the box and find it is red, what is probability
that it is striped?
3. What is the probability of getting dotted ball given that it is green?

Example - Solution
1. P(A) = 1/10
2. P(S/R) = P(SR) / P(R) = (4/10) / (6/10) = 4/6 = 2/3
3. P(D/G) = P(DG) / P(G) = (1/10) / (4/10) = 1/4

Joint Probability for Statistically
Dependent Events
Probability of event B
Joint probability of events B given that event A has
and A happening together or happened
in succession
P(BA) = P(B / A) x P(A)
Probability that event A will happen

Marginal Probabilities under Statistical
Dependence
• P(R) = P(SR) + P(DR) = 4/10 + 2/10 = 6/10
• P(G) = P(SG) + P(DG) = 3/10 + 1/10 = 4/10
• P(S) = P(SG) + P(SR) = 3/10 + 4/10 = 7/10
• P(D) = P(DR) + P(DG) = 2/10 + 1/10 = 3/10

Probabilities under Statistical
Dependence
Green Red Total
Dotted 1 2 3
Stripped 3 4 7
Total 4 6 10
Note: Distinguish between conditional probability and joint probability by

careful use of terms given that and both … and:
P(A/B) is “the probability that A will occur given that B has occurred” and
P(AB) is “the probability that both A and B will occur”.
Marginal probability P(A) is the “probability that A will occur, whether or not B
happens”

Bayes’ Theorem

Bayes’ Theorem
Posterior Probabilities definition:
• Certain probabilities change after the people involved got additional

information. The new probabilities are known as revised, or
posterior, probabilities. Because probabilities can be revised as
more information is gained, probability theory is of great value in
managerial decision-making.
• Example: In a competitive Examination
– P (selection) = 0.05 (1/20)

– The candidate is called for an interview
– P ( selection / interview call) = 0.3 (3/10)

Bayes’ Theorem
• Bayes’ Theorem deals with the posterior probability assessment of
an event.
Suppose B1 and B2 are mutually exclusive and collectively

exhaustive events with prior probabilities P(B1) and P(B2) which are
known.
Suppose A is an event having conditional probability P(A / B1), P(A /

B2) which are also known.
Then, Posterior probability of events B1 given that the event A has

already happened is given by
P(A / B1) x P(B1)
P(B1 / A) = --------------------------------------------------------
P(A / B1) x P(B1) + P(A / B2) x P(B2)

Bayes’ Theorem
Example
• An item is manufactured by three machines M1, M2, and M3. Out of the
total items manufactured during specified production period, 50% are
manufactured on M1, 30% on M2, and 20% on M3.
• It is also known that 2% of the item produced by M1 and M2 are defective,

while 3% of those manufactured on M3 are defective.
• All the items are put into one bin.
• From the bin, one item is drawn at random and is found to be defective.
What is the probability that it was made on M1, M2, or M3.

Bayes’ Theorem
Example - Solution
A = Item is defective
B1 = Item is manufactured on M1
B2 = Item is manufactured on M2 Mutually Exclusive
B3 = Item is manufactured on M3
Prior Probabilities of manufacturing on M1 = P(B1) = 0.5

Probability of Defective item on M1 = P(A/B1) = 0.02

To calculate Posterior Probability [knowing that the event A has already happened (item
is defective)] that it is manufactured on M1 is given by
P(A / B1) x P(B1) (0.02)(0.5)
P(B1 / A) = ------------------------------------------------- = ------------------------------------------------
P(A / B1) x P(B1) + P(A / B2) x P(B2) (0.02)(0.5) + (0.02)(0.3) + (0.03)(0.2)
= [0.01] / [ 0.01 + 0.006 + 0.006] = 0.01 / 0.022 = 0.454

Bayes’ Theorem
Example - Solution


To calculate Posterior Probability [knowing that the event A has already happened (item
is defective)] that it is manufactured on M1 is given by
P(A / B1) x P(B1) (0.02)(0.5)
P(B1 / A) = ------------------------------------------------- = ------------------------------------------------
P(A / B1) x P(B1) + P(A / B2) x P(B2) (0.02)(0.5) + (0.02)(0.3) + (0.03)(0.2)
= [0.01] / [ 0.01 + 0.006 + 0.006] = 0.01 / 0.022 = 0.454
P(B2/A) = (0.02)(0.3)/ 0.022 = 0.006 / 0.022 = 0.273
P(B3/A) = (0.03)(0.2)/ 0.022 = 0.006 / 0.022 = 0.273

Bayes’ Theorem
Exercise
• When a machine is set correctly, it produces 25% defectives,

otherwise it produces 60% defectives.
• From the past experience, the manufacturer knows that the chances
that the machine is set correctly or wrongly is 50 : 50.
• The machine was set before the commencement of production. One
piece was inspected and found to be defective.
• What is the probability of machine set being correct?

Bayes’ Theorem
Solution
• A = The piece is defective
• B1 = Machine set up was correct P(B1) = 0.5
• B2 = Machine set up was wrong P(B2) = 0.5
• P(A /B1) = Set up correct but defective piece = 0.25
• P(A /B2) = Set up wrong but defective piece = 0.60
• Probability of set up being correct and defective piece produced
P(A / B1) x P(B1)
P(B1 / A) = --------------------------------------------------------
P(A / B1) x P(B1) + P(A / B2) x P(B2)
= (0.25)(0.5) / [(0.25)(0.5) + (0.60)(0.5)]

= 0.125 / 0.425
= 0.29

Probability Introduction
The End

Amity MBA Chapter 5 Probability

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Amity MBA Chapter 5 Probability

Uploaded by

Copyright:

Available Formats

Probability: Introduction

Sharad Kant Amity MBA QT 2

Sharad Kant Amity MBA QT 3

– An activity that produces an event is referred in probability

Sharad Kant Amity MBA QT 4

– Examples Sample Space

Sharad Kant Amity MBA QT 5

Sharad Kant Amity MBA QT 6

Example: Contingency Table for Face-colour variable of a

Red Black Total

Sharad Kant Amity MBA QT 7

Sharad Kant Amity MBA QT 8

Sharad Kant Amity MBA QT 9

Sharad Kant Amity MBA QT 10

• If all N possible outcomes in the sample space are

Probability (A) = (# of outcomes where event A occurs) / N

Note: This probability is not a random number. The probability is

Sharad Kant Amity MBA QT 11

Sharad Kant Amity MBA QT 12

Sharad Kant Amity MBA QT 13

Sharad Kant Amity MBA QT 14

Sharad Kant Amity MBA QT 15

Sharad Kant Amity MBA QT 16

2. Random experiment of throwing two dice find the

Sharad Kant Amity MBA QT 17

Sharad Kant Amity MBA QT 18

– e.g., A = “get Amity job offer”, B = “get Professor job offer”

Sharad Kant Amity MBA QT 19

– e.g., A = “sign contract”, B = “get financing”

Sharad Kant Amity MBA QT 20

• Prob(A or B) = Prob (A) + Prob (B) – Prob (A and B)

• Prob (A and B) = Prob (A) + Prob (B) – Prob (A or B)

Sharad Kant Amity MBA QT 21

– Prob (Success given Good results in test market) is Higher than

Sharad Kant Amity MBA QT 22

– This is a (conditional) probability about A

Sharad Kant Amity MBA QT 23

– Conditional probability of buying a Dryer given that they bought a

Sharad Kant Amity MBA QT 24

Prob (A given B) = Prob (A) d e n t, .

• Mutually exclusive events are dependent events

Sharad Kant Amity MBA QT 26

• P(A1υA2 υ … υ An) = P(A1) + P(A2)+ … + P(An)

Horse A winning = P(A) = 1/4

– What is the probability of winning of at least one of them in the

Sharad Kant Amity MBA QT 27

P(A) = P(AB) + P(A.notB) P(B) = P(AB) + P(notA.B)

P(A + B) = P(A) + P(B) – P(AB)

Sharad Kant Amity MBA QT 28

What is the Probability that a tourist coming to India will visit

What is the probability that he will visit neither city?

Sharad Kant Amity MBA QT 29

P(D) = 0.8 P(M) = 0.7 P(DM) = 0.6

Probability that a tourist will visit Delhi or Mumbai or both

Probability that he will visit neither city = 1 – P(D + M) = 0.1

Sharad Kant Amity MBA QT 30

Sharad Kant Amity MBA QT 31

Sharad Kant Amity MBA QT 32

P(“not A” and “not B”)

Sharad Kant Amity MBA QT 33

Sharad Kant Amity MBA QT 34

• Next, subtract: 1 – 0.20 = 0.80, 0.25 – 0.15 = 0.10

Sharad Kant Amity MBA QT 35