Probability theory is an important part of statistical theory that bridges descriptive and inferential statistics. It is the science of uncertainty or chance, or likelihood.

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Probability theory is an important part of statistical theory that bridges descriptive and inferential statistics. It is the science of uncertainty or chance, or likelihood.

Attribution Non-Commercial (BY-NC)

- Probability Theory in Decision Making
- Introduction to Probability
- Concept of Probability and Probability Distribution
- Applications of Probability
- Basic Concepts of Statistics
- Probability
- Probability and Statistics
- Lecture Notes Statistics
- Probability
- Probability of Simple Events
- Probability Distributions
- Probability and Statistics Book Solutions
- Introduction to statistics
- Qualitative and Quantitative Decision Making Method in Simulation Model
- Questions
- Probability 1
- Teachers Manual
- Decision of Uncertainty Paper.docxfinal
- BAYES theorem
- LAW 421 Wk 5 PPT-1

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Objectives

• Define terminology related to probability.

• Differentiate between probability and non-probability sampling designs.

• Describe the probability distribution of a random variable.

• Explain the concept of a normal probability distribution.

• Explain the standard normal distribution.

1. Probability

and inferential statistics. It is the science of uncertainty or chance, or likelihood.

likelihood that a particular event will happen. A probability value of 0 means there

is no chance that an will happen and a value of 1 means there is 100 percent

chance that the event will happen.

experiment or sample test provides an outcome that can be used to compute the

chance of events occurring in the future. An experiment is the observation of

some activity or the act of taking some measurement. Whereas, an outcome is a

particular result of an experiment. The collection of one or more outcomes of an

experiment is known as an event. For example, a market testing of a sample of

new breakfast cereal, new beer, new wine, new magazine, etc. gives the Director

of Production or Director of Marketing a company a preliminary idea (outcome)

whether consumers would like the product if it is produced and distributed in bulk.

There are three definitions of probability. The first one is known as classical

probability. The classical definition applies when there are n equally likely

outcomes to an experiment. It is obtained by dividing the number of favorable

outcomes by the total number of possible outcomes.

are definitive. For example:

(1) The chance that a woman gives birth to a male or female baby (p = 0.50

or ½),

(2) The chance that tail or head appears in a toss of coin (p = 0.50 or ½), and

(3) The chance that one spot will appear in die-rolling (p = 0.16 or 1/6).

The second one is empirical probability that is based on past experience. This is

determined dividing the number of times an event happens by the total number of

observations. For example:

Lirenso: RES 341 2

(1) 383 of 751 business graduates were employed in the past. The probability

that a particular graduate will be employed in his or her major area is

383/751 = 0.51 or 51%.

(2) The probability that your income tax return will be audited if there are two

million mailed to your district office and 2,400 are to be audited is

2,400/2,000,000 = 0.0012 or 0.12%.

assigned to an event based on whatever evidence is available. It is an educated

guess. Unlike empirical probability, it is not based on past experience. Subjective

probability is obtained by evaluating the available options and by assigning the

probability. Examples of events that require computing subjective probability:

(1) Estimating the probability that a person wins a jackpot lottery.

(2) Estimating the probability that the GM will lose its first ranking in car sales.

2. Events

complement. Combining probabilities of events requires using the rules of

addition and multiplication (see table below).

A) Two events are mutually exclusive if by virtue of one event happening the

other cannot happen. For example, A business can’t be bankrupt, break-even

and profitable at the same. It can only be one of the three. Similarly, being a male

or female are mutually exclusive and collectively exhaustive events. None one is

both and everyone is one or the other.

Example: The two most common primary causes of death in the US are heart attack and cancer.

Heart attack is the cause for one-third (0.33) of the Americans who die each year and cancer is

the cause for one-fifth (0.20) of the deaths each year. If 2003 is like 2002, the probability that a

randomly selected American will die of either a heart attack or cancer is the sum of these two

probabilities. 0.33 + 0.20 = 0.53. [Special Rule of Addition].

B) Events are joint if two or more events happen at the same time. For example,

driving autos is one event and talking on the cell phone is another event. When

you see someone talking on the cell phone while driving an automobile it is a

joint event.

Example: If 90% of the Citibank customers have a saving account, 40% have a market rate

account, and 60% have both, the probability that a randomly selected Citibank customer will have

either saving or market rate account will be computed as:

0.90 + 0.40 – 0.60 = 0.70 [General Rule of Addition].

C) Events are independent if the occurrence of one event does not affect the

occurrence of another event.

Lirenso: RES 341 3

Example:

Suppose the probability that a student gets an “A” grade is 0.50 in statistics and 0.60 in History.

Assume that the grade received in statistics is independent of the grade received in History. The

probability that the student will receive an “A” grade in both subjects (statistics and History) is

computed as:

(0.50) x (0.60) = 0.30 [Special Rule of Multiplication].

(1) Two traffic lights on Broadway Road operate independently. Your probability of being

stopped at the first one is 0.4 and your probability of being stopped at the second one is

0.7. The probability of being stopped at:

A) both lights = 0.4 x 0.7 = 0.28

B) neither light = 0.6 x 0.3 = 0.18

C) the first but not the second = 0.4 x 0.3 = 0.12

D) the second but not the first = 0.7 x 0.6 = 0.42

CONNECTING RULE

WORDS

1 Mutually No overlapping The probability of A Special Rule of P(A or B) =

exclusive events - if one event occurring or Addition P(A)+ P(B)

happens the other the probability of B

one can’t occur at occurring

the same time

2 Not mutually Overlapping/ The probability that General Rule of P (A or B) =

exclusive Concurrent events – either A may occur Addition P(A)+ P(B) –

(Joint/ two or more events or B may occur P(A and B)

Compound) happen at the same followed by the

time possibility that both

A and B may occur.

3 Independent The occurrence of The probability that Special Rule of P(A and B) =

event A has no A and B will occur Multiplication P(A)P(B)

effect on the

occurrence of

another event B

4 Conditional Dependent events – P(B|A) – probability General Rule of P(A and B) =

the probability of a that event B will Multiplication P(A)P(B|A)

particular event occur given that

occurring given that event A has already

another event has occurred

occurred

5 Complement All events in the Event Not occurring Complement Rule P(A) = 1 – P

sample space that – (~ A)

are not part of the or

specified event – Neither/nor will

determined by happen

subtracting the

probability of an

event not happening

from the probability

of happening

Lirenso: RES 341 4

D) Events are conditional if a particular event occurs given that another event

has occurred. Bayesian theorem can be used to revise prior probabilities and

validate earlier decisions.

For example: Three defective electric toothbrushes were accidentally shipped to a drugstore by

Clean-brush products along with 17 non-defective ones.

A) What is the probability that the first two electric toothbrushes sold will be returned to the

drugstore because they are defective?

B) What is the probability that the first two electric toothbrushes sold will not be defective?

The sample space for die-rolling is {1,2,3,4,5,6}. An event in the sample space that

is not part of the specified event is known as the complement. Under conditions

where one even occurs as a subset of another event, the probability of the first

event cannot be higher than the probability of the one for which it is a subset.

Example: Suppose the probability that mortgage loans are approved by lenders in your state is

0.70 (70%). By the complement rule, the probability that loans may not be approved for a

randomly selected applicant is 0.30 (30%). 1 - .70 = .30

A contingency table with two variables, values of one variable placed in rows and

the other in columns, can be used to estimate simple & joint probabilities of

the two events. This can be demonstrated by using the following example.

An airline company completed an on-board passenger survey of 400 customers

in an attempt to measure the number of bags checked by those traveling on

business or for pleasure. Results are shown in the table below:

Business 50 60 30 10 150

Pleasure 20 80 90 60 250

Total 70 140 120 70 400

120/400 = 0.30

2) The probability that a passenger who responded to the survey was a business

customer is 150/400 = 0.375

3) The probability that a customer checked fewer than 2 bags

70/400 + 140/400 = 210/400 = 0.525

4) The probability that a customer checked more than one bag is

120/400 + 70/400 = 190/400 = 0.47

Lirenso: RES 341 5

The breakdown of the simple and joint probabilities can be displayed graphically using

the tree diagram.

50

60

30

150

10

60

400

250 90

80

20

Probabilities values for experiments whose outcomes are numerical are known

as random variables. Random variables can be discrete (have a finite number of

sample space) or continuous (have an infinite number of sample space). An

example of discrete probability distributions is binomial distribution [See Table A2

in the Appendix].

• Each trial (X) may be selected from infinite population without replacement

or from a finite population (N) with replacement.

• Each trial (X) is mutually exclusive and collectively exhaustive

• Each trial (X) has two possible outcomes, success or failure.

• Each trial has a fixed probability of success or failure (π).

P(x) = ___n! πx(1-π)n-x

x!(n-x)!

Where:

n is the number of trials.

x is the number of success or failures

π is the probability of success or failure on each trial.

The above formula can also be written as follows:

P(x) = nCr π x (1−π)n-x

Lirenso: RES 341 6

The probability notation summary for different values of P (x) is given in the table

below. It is important to understand the meaning of terms such as “at least”,

“more than”, “at most”, “less than”, “between X1 and X2 inclusive”, and

“between X1 and X2.” They indicate cumulative binomial probabilities that involve

adding the values up or down. MS Excel can be used to determine the binomial

probabilities of an event.

At least x P(X ≥ x)

More than x P(X > x)

At most x P(X ≤ x)

Less than x P(X < x)

Between x1 and x2 inclusive P(x1 ≤ x ≤ x2)

Between x1 and x2 P(x1 < x < x2)

Example:

Suppose AAA road emergency service has been 60% successful in the past

reaching its customers within 30 minutes. What is the probability of obtaining

three successful calls within an acceptable time in a sample of five monitored

service calls in this particular sequence?

This problem can be solved in thre different ways.

1) It can be computed using the binomial probability distribution formula. In the

above problem:

π = 0.60, n = 5, X = 3.

P(x=3) = 5! 0.603(1-0.60)5-3

3!(5-3)! = 0.346

2) This value can also be read directly from the Binomial Distribution table. In the

table where n = 5, the intersection of row x = 3 and column π = 0.60 would give

a probability of 0.346.

Exponential. Hypergeometric is different from binomial and its probability

changes from one trial (experiment) to another. Poisson is known as a probability

of zero and works with averages, instead of π.

symmetric, bell-shaped distribution that takes a normal random variable, with μ

being the mean of the normal random variable, X being any value below or

above μ, and ơ being the standard deviation from the center of distribution.

Lirenso: RES 341 7

• The normal curve is bell shaped and has a single peak at the exact center

of the distribution.

• The mean, median, and mode of distribution are equal and located at the

peak.

• Half of the area under the curve is above the peak, and other half is below

it.

There are several families of the normal distribution curve. The standard one has

a random variable Z, μ = 0 and ơ = 1. Based on the Empirical Rule, there are 3ơ

on each side of the curve. Probability value is zero at 4ơ and beyond from the

center.

The probability values for each Z-value are listed in Table A19 for Z value located

to the left of μ and in the same table for the Z-value located to the right of μ). As

explained in Week Three Lecture, the Z-value measures the number of standard

deviations that a data value is from the population mean. The value of Z is

obtained using the formula:

Z = X – μ (‘s’ can be substituted for ơ if the population parameter is unknown)

ơ

A negative Z value shows that the random variable is located to the left of μ and

a positive Z value means the random variable is located to the right of the center.

The rules for solving different normal probability problems are given below.

1 P(Z < z) below a value of Z the Z value and use the table directly

2 P(Z > z) above a value of Z The Z value and subtract the value in the

table from 1 OR the negative of the Z

value and use the table directly

3 P(z1 < Z < z2) Between two values of Z Both Z values and subtract the lower

value from the higher value

4 P(Z = z) exactly the value of Z the Z value in table directly (left side of

the curve if Z-value is negative (right side

of the curve if Z-value is positive) in Table

A19.

Example:

The amount of money requested in home loan applications at Dawn River Federal Savings are

approximately normally distributed with μ = $70,000 and ơ = $20,00. A loan application is

received this morning. What is the probability that:

Z = 80,000 – 70,000/20000 = 0.5. When Z = 0.50, the probability area is 0.3085 in standard

normal table or 1.00 – 0.6915 = 0.3085.

B) The amount requested is less than $65,000? The answer is 0.4012. Using Z = X – μ/ ơ,

Z = 65,000 – 70,000/20000 = -0.25. This can be directly obtained from standard normal table,

using row Z = -0.2 and column 0.05.

Lirenso: RES 341 8

If the number of possible outcomes in an experiment is small, it is relatively easy

to count them. If, however, there are a large number of possible outcomes, it

would be tedious to count all the possibilities. To facilitate counting, three

counting formulas will be examined: the multiplication formula, the permutation

formula, and the combination formula.

Total number of arrangements = (m)(n).

Example: If a salesperson has seven shirts and 5 ties to display, 35 outfits are

possible. This means he or she has 35 different ways displaying the outfits. This

can be extended to more than two events. For three events m, n, and o: Total

number of arrangements _ (m)(n)(o).

The permutation formula is applied to find the possible number of

arrangements when there is only one group of objects. Order is very important in

permutation. Note the arrangements a b c and b a c are different permutations.

The formula to count the total number of different permutations is:

where:

n is the total number of objects (pool).

r is the number of objects selected at a time.

Before we solve the two problems illustrated, note that permutations and

combinations use a notation called n factorial. It is written n! and means the

product of n(n-1), (n-2), (n-3), (n-4), (n-5), etc. For instance, 5! Means 5 x 4 x 3 x

2 x 1 = 120.

By definition, zero factorial, written 0!, is 1. That is, 0! = 1.

Example: A flag with three stripes of 3 colors can use any of six colors. How

many flags are possible. This is a permutation problem and the order of

arranging the flags is important.

Lirenso: RES 341 9

n Pr = 6P3 = 6! = 120

(6-3)!

If the order of the selected objects is not important, any selection is called a

combination. The formula

to count the number of r object combinations from a set of n objects is:

Example: You have 6 colors to choose from and you wish to choose 3 for a flag.

How many choices are possible? This is a combination problem the order of

arranging colors in not important.

n Cr = 6C3 = 6! = 20

3!(6-3)!

Discussion Questions

1. Give three real-life or business examples for each of the following:

B) Joint events

C) Independent events

D) Conditional events

2. Chances are 50-50 that a newborn baby will be a girl. For families with five

children, what is the probability that all the children are girls? [Hint: use binomial

probability distribution]

3. Assume a restaurant business succeeds 60% of the time. Suppose that there

are three such restaurants open in your city. When they don’t compete with one

another, it is reasonable to believe that their relative success would be

independent. [Hint: use binomial probability distribution]

4. A recent study of the hourly wages of maintenance crews for major airlines

showed that the mean hourly salary was $16.50, with a standard deviation of

$3.50. If we select a crew member at random, what is the probability the crew

member earns:

Lirenso: RES 341 10

b. Between $16.50 and $20.00 per hour?

c. More than $20.00 per hour?

d. Less than $15.00 per hour?

combination method of selecting or arranging objects?

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