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Probability Models
Concerned with the study of random (or chance) phenomena Random experiment: An experiment that can result in different outcomes, even though it is repeated in the same manner every time
Probability
Managerial Implication: Due to this random nature additional capacities for any setup are required
Although random, certain statistical regularities are to be captured to form the model Model: An abstraction of real world problem
Sample Space
A set of all possible outcomes of a random experiment Denoted by S Examples:
Tossing of a coin: S = {Head, Tail} Throwing of a dice: S = {1, 2, 3, 4, 5, 6} Marks of a student in a 20 mark paper with only integer negative marking possible: S = {-20, -19, , -1, 0, 1, , 19, 20} Number of people arriving at a bank in a day: S = {0, 1, 2, } Inspection of parts till one defective part is found: S = {d, gd, ggd, gggd, } Temperature of a place with a knowledge that it ranges between 10 degrees and 50 degrees: S = {any value between 10 to 50} Speed of a train at a given time, with no other additional information: S = {any value between 0 to infinity}
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Out of the previous examples, which ones are discrete sample spaces???
Continuous sample space: One that contains an interval of real numbers. The interval can be either finite or infinite
Events
A collection of certain sample points A subset of the sample space Denoted by E Examples:
Events (cont)
Complement of an event E1: E1 = S E1 Intersection of two events: E3 = E1 Union of two events: E4 = E1 U E2 Two events A and B are mutually exclusive if: A U B= U E2
Getting an odd number in dice throwing experiment S = {1, 2, 3, 4, 5, 6}; E = {1, 3, 5} Getting a defective part within the first three inspected parts S = {d, gd, ggd, gggd, ggggd, }; E = {d, gd, ggd} Event of a component not failing before time t: S = [0, ); E = [t, )
Union and Intersection can be extended to more than two events Two events A and B are mutually exclusive and exhaustive if: A U B = and A U B = S
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NotDefective
Head
Tail
S A A B C
AUB
B D
Defective
NotDefective
Head
Tail Head
Tail
Defective
NotDefective
Probability
Probability of an event represents the relative likelihood that performance of the experiment will result in occurrence of that event P(A) = Probability of the event A in the sample space Examples:
The objective of inferential statistics is to make an inference about a population of interest based on the information obtained from the sample from that population
A = Getting an odd number in dice throwing experiment P(A) = 0.5 B = Getting two heads in two successive tosses of a coin P(B) = 0.25
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Relative Frequency Approach: probability based on long term relative frequency --- requires a large amount of historical data
Subjective Probability: probability based on ones judgement (e.g. how may days will it take for a consignment to reach from Indore to Delhi?)
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Addition Rules
If A and B are any two events then, P(A U B) = P(A) + P(B) P(A U B)
P(E1) = 1 P(E1) If event E1 is contained in event E2, then P(E1) <= P(E2)
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Conditional Probability
The conditional probability of A given B is: P(A|B) = P(A if P(B) 0; else it is undefined U B) / P(B)
Multiplication Rule
The conditional probability rule can be rewritten to get the multiplication rule: P(A U B) = P(A|B) x P(B) = P(B|A) x P(A)
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Example
A consulting firm is bidding for two jobs, one with each of two large multinational corporations. The company executives
Example
In a standard government run lottery in Europe and North America, you choose 6 out of 49 numbers (1 through 49). You win the biggest prize if these 6 are drawn. (The prize money is divided between all those who choose the lucky numbers. If no one wins, then most of the prize money is put back into next week's lottery). You are offered two tickets A = (1,2,3,4,5,6) or B = (39,36,32,21,14, and 3). Do you prefer A, B, or are you indifferent between the two?
estimate that the probability of obtaining the consulting job with firm A, event A, is 0.45. The executives also feel that if the company should get the job with firm A, then there is a 0.90 probability that firm B will also give the company the consulting job. What are the companys chances of getting both jobs?
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U U
C)
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Independence
Two events A and B are independent if any one of the following equivalent statements are true: P(A|B) = P(A) P(B|A) = P(B) P(A U B) = P(A) x P(B)
A couple has two girls. What is the chance of delivering a baby girl for the third time?
If a list of events is mutually independent, the probability of their intersection is the product of their probabilities
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If the three loans are from three different companies, but in the same business, example suppliers of auto parts. Loan repayment problem with one of the customers is very likely an indication of similar problems with remaining two customers. Is the assumption of independence valid in such a case?
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What can you say about the estimate for P(B|A)? Is the independence of events desirable in such a case?
independent.
If two events are mutually exclusive then they can never be independent.
A = {1st toss result is a tail}, B = {2nd toss result is a tail}, C = {the two tosses have different results}.
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First three conditions simply assert that any two events are independent, a property known as pairwise independence. The fourth condition is also important and does not automatically follow from the first three. Conversely, the fourth condition does not imply the first three
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Education
Poor (<$25K) 10.51 10.93 6.36 2.23 0.62 0.16 0.09 30.9
Lower Middle ($25K to ($50K to $50K) $75K) 4.26 10.57 8.36 4.16 1.26 0.22 0.21 29.04 1.32 5.84 5.84 4.15 1.36 0.29 0.29 19.09
Upper (>$75K) 0.68 3.87 5.23 6.57 2.84 0.99 0.80 20.98
Row total
No HS diploma High school grad. Some college Bachelors deg. Masters deg. Professional deg. Doctorate Column total
In general, Given k mutually exclusive and exhaustive events S1, S2, Sk and any other event A, the probability of event A can be expressed as: P(A) = P(A S1) + P(A S2) + + P(A
All cells show percentages Sample size is 98 million households Source: Statistics for Business Decision Making and Analysis by Stine and Foster 27 28
Bayes Rule
P(Si) is called as the prior probability of Si because it does not take into account any other behaviour and is based on historical data
In practice, Bayes Rule can be applied to re-evaluate (or update) It is estimated that 10% of the region under consideration actually has oil underneath. For a certain survey, if the machine has given a positive result for a certain area under consideration within the region, what is the probability that the oil is actually present in that area? the prior belief of probabilities of S1, S2, , Sk, when new information is obtained (as a result of event A happening)
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Bc)
Sk)
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Additional Examples
Samples of emission from three suppliers are classified for
conformance to air-quality specifications. The results from 100 samples are summarized as follows: Confirms Supplier 1 Supplier 2 Supplier 3 22 25 30 Not confirms 8 5 10
Let A denote the event that the sample is from supplier 2 and let B
1. These results are worthless 2. It is likely that the patient does not have the strep throat. 3. It is slightly more likely than not, that patient does have the strep throat. 4. It is very much more likely than not, that patient does have the strep throat.
denote the event that the sample confirms the specifications. If a sample is selected at random, determine the following probabilities: (a) P(A), (d) P(A (b) P(B), B), (e) P(A U B), (c) P(A), (f) P(A U B)
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Additional Examples
A lot contains 15 castings from a local supplier and 25 castings from a supplier from the next state. Two castings are selected randomly without replacement from the lot of 40. Let event A be that the first casting is selected from the local supplier and the event B be that the second casting is selected from the local supplier. Determine the following:
Software to detect fraud in customer phone cards tracks the number of metropolitan areas where the calls originate each day. It is found that 1% of legitimate callers originate calls from more than one metropolitan areas in a single day. As against these, 30% of the fraudulent users originate calls from more than one metropolitan areas in a single day. The proportion of fraudulent users is 0.01%. If a same user originates calls from more than one metropolitan area in a single day, what is the probability that the user is fraudulent?
P(A
P(A U B)
P(A) P(B|A) B)
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Additional Examples
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