Session 4: Probability

Statistics for Business

Dr. Le Anh Tuan

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Definitions
►Random Experiment
►A process leading to an uncertain outcome
►Example: Flip a coin

►Sample space
►All possible outcomes of a random experiment
►Flip a coin, the sample space consists of 2 outcomes S
= {H, T}.

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Definitions
►Event
►One or more outcomes of an experiment.
►Any subset of outcomes in the sample space.
►Simple Event (elementary event)
►is a single outcome.
►Flip a coin,
►The sample space consists of 2 simple events: S = {H,
T}
►An event of getting one Head: E = {H}
►Flip a coin twice,
►The sample space consists of 4 simple events:
S = {HH, HT, TH, TT}
► An event of getting one Head is a compound event:
E = {HT, TH}
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 Probability

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Probability
► A probability is a numerical value ranging from 0 to 1.

► The probability of an event measures the relative likelihood

that the event will occur.

► The probability of event A, denoted P(A).

► The sum of all the probabilities for the sample events in the
sample space must be equal to 1.
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Assigning Probability

Methods of Assigning Probability

Classical Empirical Subjective

Assigning Assigning Assigning

probabilities based probabilities probabilities based
on the assumption based on on judgment.
of equally likely experimentation
outcomes. or historical data.

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Classical methods
► Used when the number of possible outcomes of the event of
interest is known.

► The probability that Event A will occur:

$%&'() *+ *%,-*&(. ,ℎ0, .0,1.+2 ,ℎ( (3($, "

! " =
,*,04 $%&'() *+ 5*..1'4( *%,-*&(. 1$ ,ℎ( .0&54( .50-(

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Classical methods

$%&'() *+ *%,-*&(. ,ℎ0, .0,1.+2 ,ℎ( (3($, "

! " =
,*,04 $%&'() *+ 5*..1'4( *%,-*&(. 1$ ,ℎ( .0&54( .50-(

► Example: Roll a die once, sample space ={1,2,3,4,5,6}

► Event A as rolling a four

► Possible outcomes: 6
► Event A can happen one way

► P(A)=1/6=16.7 %

► Probability of Event A is 16.7%

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Classical methods

$%&'() *+ *%,-*&(. ,ℎ0, .0,1.+2 ,ℎ( (3($, "

! " =
,*,04 $%&'() *+ 5*..1'4( *%,-*&(. 1$ ,ℎ( .0&54( .50-(

► Example: There are 5 red and 3 blue balls in a bag. One ball is
taken at random. What’s the probability it is a red ball?

► P(A) = ?

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 Empirical methods
► Empirical probability describes the relative frequency of actual
observations of an event in experiment or historical data.

► Conducting an experiment to observe the frequency with which

an event occurs.

► The empirical probability of Event A :

$%&'(&)*+ ,) -ℎ,*ℎ &/&)0 " 1**(%2
! " =
01034 )(56&% 1$ 162&%/30,1)2

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 Empirical methods
► UEH University conducts monthly salary surveys for 100
graduates and obtains the following outcomes:
Salary frequency
$ 600 and more 25
$400 - $599 43
$200 - $399 10
Less than $200 22
► Find the probability of a graduate who has a monthly salary
between $200 - $399.
► Find the probability of a graduate who has a monthly salary over
$ 400.

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 Subjective Probability
► Used when classical or empirical probabilities are not
available.
► When economic conditions and a company’s circumstances
change rapidly it might be inappropriate to assign
probabilities based solely on historical data.

► Use individuals’ opinion, experience, belief to estimate the

probabilities.
► Example
► I think that the inflation rate in 2024 is 5%.
► I guess the probability of raining today is 40%.

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 Laws of Large Numbers
► The law of large numbers states that as the sample size
increases, the empirical probabilities of a process will converge
towards the classical probabilities.

► Example: Flip a coin a large number of times.

► The probability of getting HEADS is close to 50%.

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 Probability Rules
► There are some basic probability relationships that can
be used to compute the probability of an event without
knowledge of all the sample point probabilities.
► Complement of an Event
► Union of two Events
► Intersection of Two Events
► Mutually Exclusive Events

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 Complement of an event
► The complement of an event A is denoted by Aʹ (or Ā)
and consists of everything in the sample space except
event A.
► A and Aʹ together comprise the entire sample space:
P(A) + P(Ā) = 1 or
P(A) = 1 - P(Ā )
► For example, about 40% of small firms went bankrupt
after Covid-19. The probability that a business will
survive after Covid is: !(#$%&'()) = 1 − !(.(/0%$12) = 60%

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 Probability Rules

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 Intersection of Two Events
► The intersection of two events A and B (denoted A ∩ B or “A
and B”) is the set of all sample points that are in both A and B.

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 Intersection of Two Events
► The probability of the intersection of two events is known as a joint
probability.
► Contingency Table for Students’ major:

Major Females Males Total

International Business 100 125 225

Marketing 200 150 350
Finance 100 120 220
Accounting 125 80 205
Total 525 475 1000
► Find a probability that a student will be a female (Event A) and study IB
(Event B) ➔ The intersection of Event A and B
► The number of students that satisfies the criteria is the intersection of the
Females column and IB row.
&''
! " ∩ $ = &''' = 0.1
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 The Union of Two Events
► The union of two events A and B (denoted A ∪ B or “A or B”)
represents the number of instances where either Event A or B
occur or both events occur together.

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 The Union of Two Events
► Contingency Table for Students’ major:
Major Females Males Total

International Business 100 125 225

Marketing 200 150 350
Finance 100 120 220
Accounting 125 80 205
Total 525 475 1000

► Find a probability that a student will be a female (Event A) or study IB (Event

B) ➔ The union of Event A and B
► The number of students that satisfies the criteria is the total students that
include in the Females column and IB row.
&'&()'&
! "∪$ = )***
= 0.65

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 The Addition Rule
► Two events are said to be mutually exclusive if the
events have no sample points in common.
► Two events are considered to be mutually exclusive if
they cannot occur at the same time.
► Event A = customer satisfied. Even B = customer unsatisfied

! " ∪ $ = ! " + !($) ! "∪$ = ! " +! $ −! "∩$

Do not count common elements twice. We have to

subtract P(A Ç B) to avoid over-stating the probability.
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 The Addition Rule
► Contingency Table for Students’ major:
Major Females Males Total

International Business 100 125 225

Marketing 200 150 350
Finance 100 120 220
Accounting 125 80 205
Total 525 475 1000

► Find a probability that a student either is female (Event A) or studies IB

(Event B).
&'& ''& ())
► ! " ∪ $ = ())) + ())) − ())) = 0.65

► Additional rule is used to calculate the probability of the union

of events.
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 Conditional Probability
► Conditional Probability is the probability of event A occurring,
given the condition that event B has occurred.
► Denoted P(A|B). The vertical line “|” is read as “given.”

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 Conditional Probability
Major Females Males Total

International Business 100 125 225

Marketing 200 150 350
Finance 100 120 220
Accounting 125 80 205
Total 525 475 1000

► What is the probability that a student studies finance (Event A), given that a
student’s gender is male (Event B)? We want to find P(Finance|Males)

-./
► ! "#$%$&'| )%*'+ = 012 =0.252

► Given that event B has occurred, only look at 475 male

students.
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 Conditional Probability
Major Females Males Total

International Business 100 125 225

Marketing 200 150 350
Finance 100 120 220
Accounting 125 80 205
Total 525 475 1000

► ! "#$%$&'| )%*'+ =

► ! "#$%$&' ∩ )%*'+ =

► ! )%*'+ =

► ! "#$%$&'| )%*'+ =

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 Independent and Dependent Events
► Events A and B are independent when the probability/
occurrence of one event is not affected by the other event. If A
and B are independent, then

► If P(A|B) ≠ ( ) , then events A and B are not independent.

► If the occurrence of one event affects the occurrence of another

event, the events are considered dependent.

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 Independent and Dependent Events
►Example: Favorite course and Performance
►Event A: Pass the course; Event B: Favorite Course
Favorite Not Favorite Total
Pass 25 18 43

Fail 10 27 37

Total 35 45 80

%&
►! " # = '& = 0.71
.'
►!(") = /0 = 0.54
►! " # ≠ ! " ➔ the favorite course and course
performance are dependent.

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 Multiplication Rule

► Multiplication rule is used to calculate the probability of the

intersection of two events occurring, or P(A and B).

► If two events are independent, then

Because P(B|A)=P(B)
► If multiple events are all independent, the probability of them
all occurring is simply the product of their individual
probabilities:
! "# ∩ "% ∩ "& … ∩ "( = !("# ) !("% ) !("& )…. !("( )

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 Multiplication Rule
Major Females Males Total

International Business 100 125 225

Marketing 200 150 350
Finance 100 120 220
Accounting 125 80 205
Total 525 475 1000

► ! "#$%&#' ∩ )**+,-./-0 = P Females Accounting P Accounting

=??

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 Contingency tables with probabilities
Major Females Males Total

International Business 100 125 225

Marketing 200 150 350
Finance 100 120 220
Accounting 125 80 205
Total 525 475 1000

Major Females Males Total

International Business 0.100 0.125 0.225

Marketing 0.200 0.150 0.350
Finance 0.100 0.120 0.220
Accounting 0.125 0.080 0.205
Total 0.525 0.475 1.00

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 Contingency tables with probabilities
Major Females (F) Males (M) Total

International Business (IB) 0.100 0.125 0.225

Marketing (MA) 0.200 0.150 0.350
Finance (FI) 0.100 0.120 0.220
Accounting (AC) 0.125 0.080 0.205
Total 0.525 0.475 1.00

Joint probabilities marginal probabilities

'()*∩,) ..0
► ! "#| % = '(,)
= ..121 = 0.19
'()*∩7) ..021
► ! "#| 6 = '(7) = ..891 = 0.26
'(,∩>?) ..021
► ! %| <= = = = 0.61
'(>?) ..2.1

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 Decision Tree
►Decision Trees are used to display marginal and joint
probabilities from a contingency table.
Favorite (C) Not Favorite (D) Total

Pass (A) 0.31 0.23 0.54

Fail (B) 0.13 0.34 0.46

Total 0.44 0.56 1.00

e (C) ! " ∩ $ = 0.31

Favorit
Pass Not F
P(A)=0.54 avorit
e (D)
! " ∩ * = 0.23 . probabiIes
e (C) ! , ∩ $ = 0.13
Favorit =1
Fail
P(B)=0.46 Not
=> Entire sample
Fav
o rite
(D)
! , ∩ * = 0.34
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 Mutually Exclusive Events
► Mutually exclusive events are those events that cannot occur at
the same time.
► A firm cannot both fail and survive.
► P "#$%&%' ∩ )*&+ = 0

► So, mutually exclusive events are dependent. But two events

cannot be both independent and mutually exclusive.
► Independent events can occur at the same time.
► Mutually exclusive events cannot occur at the same
time.

► In other words, you cannot conclude that because events are

not independent, they will be mutually exclusive.

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 Bayes’ Theorem
► Goal: to calculate P(A|B) based on P(B|A). So, the Bayes’
formula is:

! # " !(")
! "# =
!(#)

► In situations where P(B) is not given, the form of Bayes’

Theorem is:
! # " !(")
! "# =
! # " ! " + ! # "( !("( )

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 Bayes’ Theorem
► Often we begin probability analysis with initial or prior
probabilities.

► Then, from a sample, special report, or a product test we obtain

some additional information.

► Given this information, we calculate revised or posterior

probabilities.

► Bayes’ theorem provides the means for revising the prior

probabilities.

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 General Forms of Bayes’ Theorem
► Suppose two events have prior probabilities P(A1) and P(A2)
► Call prior probabilities because we can determine
without any other information.
► A1 and A2 are mutually exclusive events.

► Assume the conditional probabilities P(B|A1) and P(B|A2) are

known, then:
! $ "1 !("1)
! "1 $ =
! $ "1 ! "1 + ! $ "2 !("2)

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 General Forms of Bayes’ Theorem

► Formula for Bayes’ Theorem for n events:

! $ "# !("#)
! "# $ =
! $ "1 ! "1 + ! $ "2 ! "2 + ⋯ + +! $ ", !(",)

where:
Ai = The ith event of interest from a choice of n events.
B = An event that has already occurred.

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 Example
►Suppose that a company has two machines, Machine A
(MA) and Machine B (MB), both producing screens .
►40% of their products come from Machine A and 60% of
their products come from Machine B.
►Hence, if a part is selected at random, we would
assign the prior probabilities.
►P(MA) = 0.4 and P(MB) = 0.6
►10% percent of the products produced by Machine A are
defective (D) and 5% of the products from Machine B are
defective.
►We have conditional probability:
►P(D|MA)=0.1 => P(ND|MA)=0.9
►P(D|MB)=0.05 => P(ND|MA)=0.95

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 Example
►If I randomly choose a product from a company and find
that it is defective, what is the probability that it came from
machine A?
►We would like to calculate P(MA|D), which is a posterior
probability.

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 Example
►P(MA)=.4 P(MB)=.6
►P(D|MA)=0.1 => P(ND|MA)=0.9
►P(D|MB)=0.05 => P(ND|MA)=0.95

P(MA|D)???

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 Example

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 Questions
►In a certain college, 10 percent of the students are science
majors; 10 percent are engineering majors; 80 percent are
humanities majors.
►Of the science majors, 20 percent are male; Of the
engineering majors, 10 percent are male; Of the humanities
majors, 20 percent are male.
►Given that a student selected at random is male, what is
the probability that that student is an engineering major?

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 Counting Rules

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Counting Rule 1

►Rules for counting the number of possible outcomes

►If there are k1 choices for the first event,

k2 choices for the second event,
kn choices for the nth event,
►Then the total number of possible outcomes are

(k1)(k2)(k3)…(kn)

For example, you want to go to a park, eat at a restaurant,

and watch a movie. There are 3 parks, 4 restaurants, and
6 movie choices. How many different possible
combinations are there? 3*4*6=72 different possibilities

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Counting Rule 2 – Permutations

►Permutations are the number of ways that n items can be

arranged in order. The number of permutations of n distinct
objects is n!
n! = (n)(n – 1)…(1)
►Notes: 0!=1

►Example:
►You have five books to put on a bookshelf. How many
different ways can these books be placed on the shelf?

►Answer: 5! = (5)(4)(3)(2)(1) = 120 different possibilities

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Counting Rule 2 – Permutations

►The number of ways of arranging X objects selected from n

objects in order is:

►Where n = the total of objects.

X = the number of objects to be selected.

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Counting Rule 2 – Permutations

►You have four books A, B, C, D and are going to put two on

a bookshelf. How many different ways can the books be
ordered on the bookshelf?
►Answer:
4! (4)(3)(2)(1)
4"# = = = 12
4−2 ! (2)(1)

►The permutations are

AB AC AD BC BD BA CD CA CB DA DB DC

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Counting Rule 3 – Combinations

►The number of ways of selecting X objects from n objects,

without regard to order, is

►When the order is important, use permutations.

►When the order does not matter, use combinations.

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Counting Rule 3 – Combinations

►You have four books A, B, C, D and are going to put two on

a bookshelf. How many combinations are possible (i.e.,
order is not important)?
►Answer:
4! (4)(3)(2)(1)
4"# = = =6
2! 4 − 2 ! (2)(1)(2)(1)

►The combinations are

AB (same as BA) BC (same as CB)
AC ( same as CA) BD (same as DB)
AD (same as DA) CD (same as DC)
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 Exercise

► Review Session 4, Online Quiz 5.

► Homework.

► Group Assignment 1

► Reading Chapter 5. Discrete Probability Distributions

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