Hapter: Introduction To Probability

1/14/2019
Learning objectives
4.1 Describe fundamental probability concepts.
4.2 Formulate and explain subjective, empirical and

CHAPTER 4 classical probabilities.
Introduction to 4.3 Calculate and interpret the probability of the

complement of an event and the probability that
probability at least one of two events will occur.
4.4 Calculate and interpret a conditional probability

and apply the multiplication rule.
continued
Copyright © 2016 McGraw-Hill Education (Australia) Pty Ltd Copyright © 2016 McGraw-Hill Education (Australia) Pty Ltd
Jaggia, Essentials of Business Statistics, 1e 4-1 Jaggia, Essentials of Business Statistics, 1e 4-2
Updated by: Azizur Rahman Updated by: Azizur Rahman
1 2
Learning objectives Sportswear brands

4.5 Distinguish between independent and • Annabel Gonzalez, chief retail analyst at marketing
dependent events. firm Longmeadow Consultants, is tracking the sales
of compression gear produced by Under Armour,
4.6 Calculate and interpret probabilities from a Inc., Nike, Inc. and Adidas Group.
contingency table. • After collecting data from 600 recent purchases,
Annabel wants to determine whether age influences
4.7 Apply the total probability rule and Bayes’
brand choice.
theorem.
3 4
LO 4.1 Fundamental probability

Fundamental probability concepts
concepts
LO 4.1 Describe fundamental probability concepts.
• An experiment is a process that leads to one of
• A probability is a numerical value that measures several possible outcomes.
the likelihood that an event occurs. – Example: Assessing the probability of a snowboarder
earning a medal in the women’s halfpipe event at the
Winter Olympics.
• The value of a probability is between zero (0) and
– Predicting the athlete’s chances of earning a medal
one (1). is an experiment because the outcome is unknown.
– A probability of zero indicates an impossible event. – The competition has four possible outcomes for the
athlete: gold medal, silver medal, bronze medal and
– A probability of one indicates a definite event.
no medal. We formally write the sample space as
S = {gold, silver, bronze, no medal}.
continued continued
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LO 4.1 Fundamental probability LO 4.1 Fundamental probability

concepts concepts
• Events are considered to be
• A sample space, denoted S, of an experiment
includes all possible outcomes of the experiment. – Exhaustive
▪ If all possible outcomes of an experiment are included in the
– For example, a sample space containing letter grades
events.
in a course is given by S = {A, B, C, D, F}.
For example, the events ‘earning a medal’ and ‘not earning a
medal’ in a single Olympic event are exhaustive since these
• An event is a subset of the sample space. are the only outcomes.
– The event ‘passing grades’ is a subset of S. – Mutually exclusive
– The simple event ‘a failing grade’ is a subset of S. ▪ If the occurrence of one event precludes the occurrence of
another.
For example, the events ‘earning a medal’ and ‘not earning a
medal’ in a single Olympic event are mutually exclusive.
continued continued
7 8
LO 4.1 Fundamental probability LO 4.1 Fundamental probability

concepts concepts
• A Venn diagram represents the sample space for • The intersection of
the event(s). two events (A ∩ B)
– This Venn diagram illustrates the sample space for consists of all simple
events A and B. events in both A and B.
• The complement of
event A (denoted Ac)
consists of all simple
events in sample space
S that are not in A.
• The union of two events (A U B) is the event
consisting of all outcomes in A or B.
continued continued
9 10
LO 4.1 Fundamental probability

Assigning probabilities
concepts
LO 4.2 Formulate and explain subjective, empirical and
• Example: Recall the snowboarder’s sample space classical probabilities.
defined as S = {gold, silver, bronze, no medal}.
– Given A = {gold, silver, bronze}, Subjective probabilities
B = {silver, bronze, no medal} and C = {no medal} • Draw on personal and subjective judgment
Find A U B, A ∩ B, A ∩ C, and Bc.
Objective probabilities
• Solution:
– A U B = {gold, silver, bronze, no medal} (note, there is no
• Empirical probability: a relative frequency of
double counting) occurrence
– A ∩ B = {silver, bronze} • Classical probability: logical analysis
– A ∩ C =  (null or empty set)
– Bc = {gold}.
continued
11 12
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LO 4.2 Assigning probabilities Rules of probability

LO 4.3 Calculate and interpret the probability of the
• Two defining properties of a probability complement of an event and the probability that at least
one of two events will occur.
– The probability of any event A is a value between 0 and 1.
Complement rule
– The sum of the probabilities of any list of mutually
exclusive and exhaustive events equals 1. • The probability of the complement of an event,
P(Ac), is equal to one minus the probability of the
• Calculating an empirical probability event.
– Observe the relative frequency with which an event P(Ac) = 1 ─ P(A)
occurs. The experiment should be repeated many times
A
if the calculated probability is to be accurate.
Ac
continued
13 14
4.3 Rules of probability LO 4.3 Rules of probability

Addition rule • Example: The addition rule
• The probability that event A or B occurs, or that at least one of – Anthony feels he has a 75% chance of getting an A in
these events occurs, is: statistics, a 55% chance of getting an A in managerial
economics and a 40% chance of getting an A in both.
What is the probability he gets an A in at least one?
P(A U B) = P(A) + P(B) – P(A ∩ B) P(AS U AM) = P(AS) + P(AM) – P(AS ∩ AM)
= 0.75 + 0.55 – 0.40 = 0.90
– What is the probability he does not get an A in either

course? Using the complement rule, we find
P((AS U AM)C) = 1 – P(AS U AM)
= 1 – 0.90 = 0.10
continued continued
15 16
LO 4.3 Rules of probability Conditional probability

LO 4.4 Calculate and interpret a conditional probability
• Addition rule for two mutually exclusive events and apply the multiplication rule.
P(A U B) = P(A) + P(B)
– Example: Samantha Greene, a third-year student,
• Conditional probability is the probability of an
contemplates her future after graduation. She thinks there is event given that another event has already occurred.
a 25% chance she will teach English in Thailand and a 35%
chance she will enrol in a surf program in New Zealand. • In the conditional probability statement, the symbol
What is the probability she chooses one of these options? ‘ | ’ means ‘given’. Whatever follows ‘ | ’ has already
P(A U B) = P(A) + P(B) = 0.25 + 0.35 = 0.60
occurred.
– For example, P(B | A) is the conditional probability that B
– What is the probability she does not choose either?
occurs given that A has already occurred.
P((A U B)C) = 1 – P(A U B) = 1 – 0.60 = 0.40
continued
17 18
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LO 4.4 Conditional probability LO 4.4 Conditional probability

• Calculating a conditional probability • Example: Conditional probabilities
– Given two events A and B, each with a positive probability – An economist predicts a 60% chance country A will perform
of occurring, the probability that A occurs given that B has poorly economically and a 25% chance country B will
occurred (A conditioned on B) is equal to perform poorly. There is also a 16% chance both countries
perform poorly. What is the probability country A performs
P ( A B) poorly given that country B performs poorly?
P ( A | B) =
P (B ) – Let P(A) = 0.60, P(B) = 0.25 and P(A ∩ B) = 0.16
P ( A B) 0.16
P ( A | B) = = = 0.64
– Similarly, the probability that B occurs given that A has P (B ) 0.25
occurred (B conditioned on A) is equal to
P ( A B) Similarly, P(B | A) = 0.27.

P (B | A) = – Since P(A | B) = 0.64 ≠ P(A) = 0.60, events A and B are
P ( A) not independent.
continued
19 20
Independent and dependent events LO 4.5 Multiplication rule

LO 4.5 Distinguish between independent and dependent
events. Multiplication rule
• Two events are independent if the occurrence of • The probability A and B both occur is equal to
one event does not affect the probability of the
occurrence of the other event. P(A ∩ B) = P(A | B)P(B) = P(B | A)P(A)
• Events are considered dependent if the occurrence

of one is related to the probability of the occurrence
• Note, when two events are mutually exclusive
of the other.
• Two events are independent if and only if P(A | B) = P(B | A) = 0, so P(A ∩ B) = 0
P ( A | B ) = P ( A) or P (B | A) = P (B )
continued
21 22
LO 4.5 Multiplication rule Contingency tables and probabilities

LO 4.6 Calculate and interpret probabilities from a
Multiplication rule for independent events contingency table.
• The joint probability of A and B equals the product • A contingency table generally shows frequencies
of the individual probabilities of A and B. for two qualitative or categorical variables, x and y.
Each cell represents a mutually exclusive
P ( A B ) = P ( A) P ( B )
combination of an x and a y value.
• The multiplication rule may also be used to

determine independence. That is, two events are
independent if the above equality holds.
– Here, x is ‘Age group’, with two outcomes,

while y is ‘Brand name’, with three outcomes.
continued
23 24
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LO 4.6 Contingency tables and LO 4.6 Contingency tables and

probabilities probabilities
• A contingency table may be used to calculate
• Each cell in a contingency table represents a probabilities using relative frequency.
frequency. – Note: Event-letter notation has been used in place of class
names in the following table.
• In the contingency table on the previous slide

– 174 customers under 35 purchased an Under Armour
product
– 54 customers aged 35 or older purchased an Under
Armour product.
– First obtain the row and column totals.
– Sample size is equal to the total of the row totals or column
totals. In this case, n = 600.
continued continued
25 26
LO 4.6 Contingency tables and Total probability rule and

probabilities Bayes’ theorem
Joint probability table LO 4.7 Apply the total probability rule and Bayes’ theorem.
• The joint probability is determined by dividing each Total probability rule

cell frequency by the grand total. • P(A) is the sum of its intersections with some
mutually exclusive and exhaustive events
corresponding to an experiment.
Consider event B and its
complement Bc. These
events are mutually
– For example, the probability a randomly selected person exclusive and exhaustive.
under 35 makes an Under Armour purchase is The circle, representing
174 event A, consists entirely
P ( A B1 ) = = 0.29 of its intersections with
600
B and Bc.
continued
27 28
LO 4.7 Total probability rule and LO 4.7 Total probability rule and
Bayes’ theorem Bayes’ theorem
Bayes’ theorem
• The total probability rule conditional on two
outcomes • A procedure for updating probabilities based
– The total probability rule conditional on two events, on new information
B and Bc, is
– Prior probability is the original (unconditional)
P ( A ) = P ( A B ) + P A Bc ( ) probability; for example, P(B).
– or equivalently – Posterior probability is the updated (conditional)

probability; for example, P(B | A).
P ( A) = P ( A | B ) P (B ) + P A | B P B ( c
) ( )
c
continued continued
29 30
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LO 4.7 Total probability rule and LO 4.7 Total probability rule and
Bayes’ theorem Bayes’ theorem
• Given a set of prior probabilities for an event and • Example: Bayes’ theorem
some new information, the rule for updating the
– Assume that 99% of people taking a polygraph test tell the
probability of the event is called Bayes’ theorem. truth. These tests are considered to be 95% reliable (i.e. a
95% chance of detecting an actual lie). Let there also be a
P( A B) P( A B) P( A B) P( B) 0.5% chance that the test erroneously detects a lie when
P( B A) = = = .
P( A) P( A B) + P( A B C ) P( A B) P( B) + P( A B C ) P( B C ) the person is telling the truth.
– Someone has just taken a polygraph test and the test has
– This probability P(B | A) is called the posterior probability detected a lie. What is the probability they were actually
when you use the prior probability of 𝑃 𝐵 . telling the truth?
– Let D denote the outcome that the polygraph detects a lie
and T represent the outcome that a person is telling the
truth.
continued continued
31 32
LO 4.7 Total probability rule and

Bayes’ theorem
• Example: Bayes’ theorem
We find:
P (T | D ) =
(0.005)(0.99 ) =
0.00495
= 0.34256
(0.005)(0.99) + (0.95 )(0.01) 0.01445
Copyright © 2016 McGraw-Hill Education (Australia) Pty Ltd

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1/14/2019

4.2 Formulate and explain subjective, empirical and

Introduction to 4.3 Calculate and interpret the probability of the

4.4 Calculate and interpret a conditional probability

Learning objectives Sportswear brands

LO 4.1 Fundamental probability

LO 4.1 Fundamental probability LO 4.1 Fundamental probability

– The event ‘passing grades’ is a subset of S. – Mutually exclusive

LO 4.1 Fundamental probability LO 4.1 Fundamental probability

LO 4.1 Fundamental probability

LO 4.2 Assigning probabilities Rules of probability

4.3 Rules of probability LO 4.3 Rules of probability

– What is the probability he does not get an A in either

LO 4.3 Rules of probability Conditional probability

LO 4.4 Conditional probability LO 4.4 Conditional probability

P ( A B) Similarly, P(B | A) = 0.27.

Independent and dependent events LO 4.5 Multiplication rule

• Events are considered dependent if the occurrence

LO 4.5 Multiplication rule Contingency tables and probabilities

• The multiplication rule may also be used to

– Here, x is ‘Age group’, with two outcomes,

LO 4.6 Contingency tables and LO 4.6 Contingency tables and

• In the contingency table on the previous slide

LO 4.6 Contingency tables and Total probability rule and

• The joint probability is determined by dividing each Total probability rule

– or equivalently – Posterior probability is the updated (conditional)

LO 4.7 Total probability rule and

Copyright © 2016 McGraw-Hill Education (Australia) Pty Ltd

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