This tutorial on Probability is prepared by the Applied Statistics and Computing lab at the Indian School of Business, Hyderabad. It is a part of the module on Probability and distributions, prepared by us.

Attribution Non-Commercial (BY-NC)

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This tutorial on Probability is prepared by the Applied Statistics and Computing lab at the Indian School of Business, Hyderabad. It is a part of the module on Probability and distributions, prepared by us.

Attribution Non-Commercial (BY-NC)

- (7) Measures of Central Tendency
- (6) Random Variables and PMF
- (1) Set Theory
- (4) Conditional Probability
- (9) Basic Box-Plot
- (15) Chi-square, Student’s t and Snedecor’s F distributions
- (2) Permutations and Combinations
- (5) Bayes' Rule
- (8) Measures of Dispersion
- (9) Geometric and Negative Binomial Distribution
- (13) Normal Distribution
- (7) Discrete Uniform Distribution
- (4) Condensation of Data
- (12) Bivariate Data
- (8) Binomial Distribution
- (10) Hypergeometric Distribution
- (10) Box-Plot With Fences
- R Tutorial
- (6) Graphical Presentation 2
- (14) Joint Distribution

You are on page 1of 15

An
Introduc2on

Applied
Sta+s+cs
and
Compu+ng
Lab
Indian
School
of
Business

Learning
Goals

Random
Experiments
Sample
Space
Events
The
idea
of
chance
Probability
of
Events
Axioms
of
Probability
Few
results
on
Probability
of
Events

2

Random
Experiment

In
the
ATP
Cincinna+
2013
nal:
Rafael
Nadal
vs
John
Isner,
Nadal
beat
Isner
to
become
the
champion.
Let
us
pick
apart
this
informa2on
a
liGle.
Before
the
nal
was
played
we
knew
there
were
two
possibili2es
:
Nadal
Wins
or
Nadal
Loses
In
a
way
this
match
is
like
conduc2ng
some
experiment
that
results
in
one
of
two
possible
outcomes
Set
of
these
possible
outcomes
is
well
dened
In
principle,
this
match
could
be
played
again
and
again
under
the
same
condi2ons
but
the
set
of
possible
outcomes
remains:
{Nadal
Wins
,
Nadal
Loses}
In
sta2s2cs
we
call
such
a
process
a
Random
Experiment,
a
formal
deni2on
is:
A
Random
Experiment
is
any
procedure
that:
Has
more
than
one
possible
outcomes
This
set
of
possible
outcomes
is
well-dened
Can
be
repeated
under
the
same
condi2ons
to
generate
the
same
set
of
outcomes

Applied
Sta+s+cs
and
Compu+ng
Lab

Before the nal was played we knew there were two possibili2es : Nadal Wins or Nadal Loses Set of outcomes here is: {Nadal Wins, Nadal Loses} We call such a set, (i.e. set of all possible outcomes of a random experiment) the Sample Space of the experiment. Let us call it S Nadal won the nal. The outcome that was realized aXer the experiment was conducted (i.e. aXer the match was played) is Nadal Wins Nadal Wins S Any element or subset of the sample space is called an Event So the Event of Nadal winning took place Note that The Sample Space is an Universal Set and Events are its subsets The sample space can be innite, example the Sample space associated with the experiment that records The arrival 2mes of customers at a showroom , S={ t, where t0} Applied Sta+s+cs and Compu+ng Lab

4

For Nadal to have become the champion, he must have won 2 sets against Isner. From now on let us extend our Random Experiment to refer to Sets played in the nal match of the championship with the win-loss records Let us denote a Nadal win with W and Loss with L. (Nadal wins Isner Loses) The Sample Space for this experiment consists of all possible Win-Loss combina2ons of each set played The possible combina2ons: {WW, WLL,WLW,LWW,LWL,LL} = Sample Space, say S1 We have WW and LL because in both cases it is not necessary to play a third set, as the winner is clear aXer the rst two. An event that has exactly one outcome associated with it is called a Simple Event Example: the event E1:Nadal wins the rst two sets , E1={WW} Consider the event E2: Isner won the rst set , i.e. E2={LWW,LWL,LL} Unlike the simple events discussed earlier we see that this event has more than one outcome Such events are called Compound Events

Probability

We
knew
before
the
nals
that
Nadal
will
Win
or
Nadal
will
Lose:
Did
we
know
with
certainty
which
of
these
events
would
take
place?
No!
All
we
knew
was
there
there
was
a
chance
that
Nadal
would
win
Intui2vely
he
had
a
chance
of
one
in
two,
i.e
50-50
on
winning
and
losing
the
match
In
theory
we
call
this
idea
of
chance,
Probability,
a
quan2ta2ve
measure
of
uncertainty
We
say
Nadal
had
a
50%
or
or
0.5
probability
of
winning
(or
losing)
the
match
The
idea
here
is
that,
if
Nadal
and
Isner
played
this
match
many
2mes
under
the
exact
same
condi2ons,
the
rela2ve
frequency
of
Nadal
winning(i.e.
the
number
of
2mes
Nadal
wins
as
a
propor2on
of
the
total
number
of
games
played)
is
Similarly
the
probability
of
Isner
winning
is

Probability:
Dened

What
is
the
probability
that
Nadal
will
win
the
nal?
We
have
already
understood
that
intui2vely
the
probability
of
this
event
is
Let
us
look
at
a
deni2on
for
Probability
of
an
Event
E
n( E ) P(E ) = n( S )
Where
n(E)=number
of
elements
in
set
E
n(S)=number
of
elements
in
the
Sample
Space
We
have
our
Sample
Space
S1
={WW,WLL,WLW,LWW,LWL,LL}
E=
Nadal
Wins
the
match
=
{WW,
WLW,LWW}
,
n(E)=3
,n(S1)
=
6
3 1 So
we
have
that
P(E)=
= 6 2

7

We have established that P(Nadal Wins) = P(Nadal Loses) = Such events are termed as Equally Likely Events Such events have equal probabili2es of occurring Let us look at our Sample Space again, S1 = {WW,WLL,WLW,LWW,LWL,LL}

Suppose someone tells you that all simple events are equally likely, i.e. in this case P( {WW} ) = P( {WLL }) = P( {WLW} ) = P( {LWW} ) = P( {LWL} ) = P( {LL} ) = 1/6 Does this seem realis2c? We know that both Nadal and Isner are very good players and that they would have given each other a good ght Intui2vely, we can say the simple events {WW} and {LL} will have lower probabili2es than the other simple events Clearly, the idea of equally likely simple events is not valid in this case (and most other cases) This idea of simple events having dierent probabili2es is a very important idea and will help understand Probability Theory beGer So we have dierent probabili2es of occurrence for the 6 simple events What can we say about these probabili2es?

8

Axioms
of
Probability

The
Axioms
of
probability
are
certain
assump2ons
that
are
made
in
Probability
Theory,
though
they
are
merely
assump2ons
we
will
see
that
they
strongly
appeal
to
our
intui2on.
Consider
a
Random
Experiment
whose
sample
Space
is
S,
we
dene
the
following
axioms
on
the
probability
of
an
event
E
in
S

Axiom
1
0
P(E)
1

P(E)=0
Event
E
will
not
occur
with
certainty
E:
Nadal
won
the
rst
three
sets
(A
third
set
wasnt
played!)
E:
{}
,
P(E)=1
Event
E
will
occur
with
certainty,
i.e.
E
is
a
sure
event
E:
Isner
played
two
sets
in
the
nal
E:
Sample
Space
An
important
idea
in
Probability
is
that,
1
is
taken
as
the
whole
and
parts
of
this
1
are
the
dierent
probabili2es
Instead
of
1
it
could
have
been
any
other
number!
All
we
had
to
do
was
standardize
it
so
that
the
whole
is
1
(
i.e.
by
dividing
by
this
number)
n( E ) Even
using
the
deni2on
of
probability
P
(
E
)
=
,
we
see
that
the
whole
is
1
because
the
maximum
value
n(E)
can
n( S ) take
is
n(S)

Axiom 2 P(S)=1

Every event belongs to S, including the null space, so occurrence of any event guarantees the occurrence of the sample space

Axiom
3
Let
E1,E2
..
be
a
sequence
of
Mutually
Exclusive
events,
i.e.
EiEj=
for
all
ij,
then
P( E ) = P( E )

i i i=1 i=1

10

Let us consider an investor worried about the returns on his risky asset: The investor expects a return of at least 15% next year The Random Experiment here is measuring the return on the risky asset (Uncertainty is associated with the risky asset) The Sample Space associated with this experiment is { returns 15% , returns<15%} Let us also dene the events E1 and E2 E1: returns 15% E2: returns < 15% Consider P(E1) & P(E2): Investors generally es2mate probabili2es based on historical data He es2mated that P(E1) = 0.65 P(E2) = 0.35

11

We have seen in Set Theory that n(E1U E2) = n(E1)+n(E2)- n(E1E2) Divide both sides by n(S), we get P(E1U E2) = P(E1)+P(E2)- P(E1E2) (Property 1) Consider the event E1E2 , i.e. the event that the returns are both 15% and < 15%. This is not possible Therefore, E1E2 =, we have learnt that probability of the null space is 0 as the event cannot occur This means that the joint occurrence of two mutually exclusive events is impossible P(E1E2)=0 , where E1E2 = (Property 2)

12

Consider the event E1UE2 = S, from Property 1 and Axiom 3 we have, P(E1UE2)=0.65+0.35=1= P(S) We know that E2 = (E1)c, From Property 1 and 2 we have that, P(E1UE2)=1=P(E1)+P((E1)c) P(E1)=1-P((E1)c (Property 3) For any event E, we have EUEc = S and EEc = Using property 1 we have P(Ec)= 1-P(E) We see that P(E1)+P(E2)= 0.65+0.35 = 1. For any sample space the sum of probabili2es of all possible events is always eual to 1 We can expect this as we are considering 1 to be the whole and the parts of this 1; to be probability of events. 2 ... If p 1 , p ,. .. ... .. . p n are the probabili2es corresponding to the n events of a Sample Space, we have: n

p

i =1

=1

13

More
Examples

A
stock
broker
is
interested
in
the
stock
price
of
a
par2cular
stock
tomorrow
It
goes
up
with
a
probability
p
Goes
down
or
remains
the
same
with
probability
1-p
In
a
rm
with
300
employees,
200
are
women
and
100
men
The
probability
that
a
person
randomly
picked
is
a
woman
is
200/300,
i.e.
2/3
Games
such
as
RouleGe,
Darts,
Die
rolling
etc
are
all
based
on
chance.
The
probability
that
a
person
hits
the
eye
of
the
dart
board
every
2me
in
20
throws
is
really
low
Out
of
a
set
of
2000
2res
manufactured
last
week,
the
2re
company
announced
that
there
were
15
defec2ve
2res
I
bought
a
2re
from
this
set,
what
is
the
probability
that
it
is
defec2ve?
2000 First
I
select
1
randomly
from
2000
2res,
I
have
c
ways
to
do
so,
this
will
be
the
size
1 of
my
Sample
Space
Event
that
I
have
one
defec2ve
2re
has
the
size
15
1
c The
probability
that
one
of
my
2res
is
defec2ve
is
15
c1 15

2000

c1

2000

= 0.0075

14

Thank you

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