Business Research Methods

Lecture 4-5 by Selim Bora

y Probabilities describe only what happens in the long run. .The Idea of Probability y Chance behavior is unpredictable in the short run but has a regular and predictable pattern in the long run. y The probability of any outcome of a random phenomenon is a number between 0(the outcome never occurs) and 1(always occurs) that describes the proportion of times the outcome would occur in a very long series of repetitions. y We call a phenomenon random if individual outcomes are uncertain but there is nonetheless a regular distribution of outcomes in a large number of repetitions. short runs of random phenomena often don·t look random to us because they do not show the regularity that in fact emerges only in very many repetitions.

y Different people can have different personal probabilities. and a personal probability need not agree with a proportion based on data about similar cases.Personal Probabilities y A personal probability of an outcome is a number between 0 and 1 that expresses an individual·s judgment of how likely the outcome is. .

and they must add to exactly 1. y The second kind of probability model assigns probabilities as areas under a density curve. We sometimes call a collection of outcomes an event.Probability Models y A probability model for a random phenomenon describes all the possible outcomes and says how to assign probabilities to any collection of outcomes. . These probabilities must be numbers between 0 and 1. y There are two simple ways to give a probability model. The first assigns a probability to each individual outcome.

y If two events have no outcomes in common. the probability that one or the other occurs is the sum of their individual probabilities. . y The probability that an event does not occur is 1 minus the probability that the event does not occur. y All possible outcomes together must have probability 1.Probability Rules y Any probability is a number between 0 and 1. y Any assignment of probabilities to all individual outcomes that satisfies first two rules is legitimate.

Sampling Distribution y The sampling distribution of a statistic tells us what values the statistic takes in repeated samples from the same population and how often it takes those values. y The total probability is 1 because the total area under the curve is 1. . sampling distributions are often described by a density curve. Because there are usually many possible values. y We think of a sampling distribution as assigning probabilities to the values the statistic can take.

Simulation y Using random digits from a table or from computer software to imitate chance behavior is called simulation. y We can use random digits to simulate random outcomes if we know the probabilities of the outcomes in three stages: y Give probability model y Assign digits to represent outcomes y Simulate many repetitions y Two random phenomena are independent if knowing the outcome of one does not change the probabilities for outcomes of the other. .

More Elaborate Simulations y Other simulations may require varying number of trials or different probabilities at each stage or may have stages that are not independent so that the probabilities at some stage depend on the outcome of earlier stages. y A tree diagram can be helpful by giving the probability model in graphical form. .

we are also interested in the long-run average outcome. if the possible outcomes are a1. y The expected value of a random phenomenon that has numerical outcomes is found by multiplying each outcome by its probability and then adding all the products. «. as in games of chance. «. p2. pk.Expected Values y When the outcomes are numbers. ak and their probabilities are p1. y In symbols. the expected value is expected value = a1p1 + a2p2 + « + akpk . a2.

y If you don·t know the outcome probabilities. the mean of the actually observed outcomes approaches the expected value. you can estimate the expected value(along with probabilities) by simulation. if a random phenomenon with numerical outcomes is repeated many times independently.The Law of Large Numbers y According to the law of large numbers. .