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Probability:

An Introduc2on
Applied Sta+s+cs and Compu+ng Lab Indian School of Business

Applied Sta+s+cs and Compu+ng Lab

Learning Goals
Random Experiments Sample Space Events The idea of chance Probability of Events Axioms of Probability Few results on Probability of Events
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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
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Sample Space, Event


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
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Simple and Compound Events


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

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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

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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
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Equally Likely Events


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?
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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)

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Axioms of Probability (contd..)


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

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Probability Proper2es: Example


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

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Probability Proper2es: Example (Contd..)


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)

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Probability Proper2es: Example (Contd..)


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
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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

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Thank you

Applied Sta+s+cs and Compu+ng Lab