Statistical distributions:

Discrete probability distribution

Chapter 5
 Chapter 5
Discrete Probability Distribution

Learning Objectives

In this chapter, you learn:

• The properties of a probability distribution

• To calculate the expected value, variance, and standard deviation of a probability distribution

• To calculate probabilities from binomial and Poisson distributions

• How to use the binomial and Poisson distributions to solve business problems
 Chapter 5
Random Variables: Discrete versus Continuous

A random variable is a variable that can take on different values according to the
outcome of an experiment. Random variables can be either discrete or continuous.

DISCRETE RANDOM VARIABLE A random variable that can take on only certain values
along an interval.

For example, in a given group of five children, the number who got at least one
electronic toy for Christmas would be 0, 1, 2, 3, 4, or 5. It could not be a number
between any of these values, such as 2.338.

CONTINUOUS RANDOM VARIABLE A random variable that can take on a value at any
point along an interval.
 Chapter 5
Probability Distribution for a Discrete Random Variable

A probability distribution for a discrete random variable is a mutually exclusive list of

all the possible numerical outcomes along with the probability of occurrence of each
outcome.

Example. Probability Distribution of the Number of Network Interruptions per Day

Interruptions Probability
per Day (X) (P(X)) P(X)
0.35
0 0.3 0.3

0.25
1 0.25
0.2
2 0.20 0.15

3 0.15 0.1

0.05
4 0.06
0
5 0.04 0 1 2 3 4 5

Interruptions per Day

1.00
 Chapter 5
Characteristics of a discrete probability distribution:

1. For any value of x, 0 ≤ 𝑃 𝑥 ≤ 1

2. The values of x are exhaustive: the probability distribution includes all possible values.

3. The values of x are mutually exclusive: only one value can occur for a given experiment.

4. The sum of their probabilities is one, or 𝑃(𝑥𝑖 ) = 1.

 Chapter 5
Discrete Random Variable Summary Measures

Expected Value of a Discrete Random Variable.

The mean of a probability distribution is the expected value of its random variable (E X ).
𝑁

𝜇=𝐸 𝑋 = 𝑥𝑖 𝑃 𝑋 = 𝑥𝑖
𝑖=1
Variance of a Discrete Random Variable
𝑁

𝜎2 = 𝑥𝑖 − E X 2 𝑃(𝑋
= 𝑥𝑖 )
𝑖=1
Standard Deviation of a Discrete Random Variable

𝜎= 𝜎2 = 𝑥𝑖 − E X 2 𝑃(𝑋 = 𝑥𝑖 )
𝑖=1
 Chapter 5
Discrete Random Variable Summary Measures

Scenario A Scenario B

Win 20,000 0.3 Win 1,000 0.9

Win 25,000 0.4 Lose 100 0.1

Lose 45,000 0.3

Which scenario do you choose?

 Chapter 5
Investment Returns
The Mean

Consider the return per $,1000 for two types of

investments.

Investment
Economic Condition
Prob. Passive Fund Aggressive Fund
X Y
0.2 Recession - $25 - $200

0.5 Stable Economy + $50 + $60

0.3 Expanding Economy + $100 + $350

 Chapter 5
Investment Returns
The Mean

E(X) = μX = (-25)(.2) +(50)(.5) + (100)(.3) = 50

E(Y) = μY = (-200)(.2) +(60)(.5) + (350)(.3) = 95

Interpretation: Fund X is averaging a $50.00 return

and fund Y is averaging a $95.00 return per $1000
invested.
 Chapter 5
Investment Returns
Standard Deviation

σ X  (-25  50) 2 (.2)  (50  50) 2 (.5)  (100  50) 2 (.3)

 43.30

σ Y  (-200  95) 2 (.2)  (60  95) 2 (.5)  (350  95) 2 (.3)

 193.71

Interpretation: Even though fund Y has a higher

average return, it is subject to much more variability
and the probability of loss is higher.
 Chapter 5
Probability Distributions

Probability
Distributions

Discrete Continuous
Probability Probability
Distributions Distributions

Binomial Normal

Uniform

Poisson Exponential
 Chapter 5
The Binomial Distribution

The probability that 3 out of 8 tosses of a coin will result in heads

The probability that Susan will beat Shannon in two of their three tennis matches

The probability of rolling at least two 3's out of seven rolls of a die

The probability that all 5 of your randomly-chosen group members will have
passed the midterm

The probability that a student blindly guessing will get at least 8 out of 10 multiple-
choice questions correct (each question has 4 possible answers).
 Chapter 5
The Binomial Distribution

The binomial distribution is used when the discrete random variable is the number of events of
interest in a sample of 𝑛 observations. The binomial distribution relies on what is known as the
Bernoulli process:

Characteristics of a Bernoulli process:

1. There are two or more consecutive trials (e.g., 15 tosses of a coin)

2. In each trial, there are just two possible outcomes—usually denoted as success or failure (e.g.,
head or tail)

3. The trials are statistically independent; that is, the outcome in any trial is not affected by the
outcomes of earlier trials, and it does not affect the outcomes of later trials.

4. The probability of a success remains the same from one trial to the next.
 Chapter 5
The Binomial Distribution

The random variable 𝑋 has a binomial distribution if

𝑛!
𝑃 𝑋 = 𝑥 𝑛, 𝑝 = 𝑝 𝑥 (1 − 𝑝) 𝑛−𝑥
𝑥! 𝑛 − 𝑥 !
𝑃 𝑋 = 𝑥 𝑛, 𝑝 - probability that 𝑋 = 𝑥, given 𝑛 and 𝑝
𝑛 – number of observations
𝑝 – probability of an event of interest (probability of “success”)
1- 𝑝 – probability of not having an event of interest (probability of “failure”)
𝑥 – number of events of interest in the sample (𝑥 = 0, 1, 2, … , 𝑛)
𝑛!
- number of combinations of 𝑥 events of interest out of 𝑛 observations
𝑥! 𝑛−𝑥 !

So, the binomial variable 𝑋 can have any integer value 𝑥 from 0 through 𝑛.
𝑝 𝑥 (1 − 𝑝) 𝑛−𝑥 - represents the probability of exactly 𝑥 events of interest from 𝑛 observations in a particular
sequence.
The Binomial Distribution: Problem
Chapter 5
example

A survey among 1,500 people carried out by an Armenian Sociological

research company, found out, that 300 of them support the upcoming
Social Security reforms.

Assuming that the sample is representable and is done in a proper

manner, what will be the probability that if we randomly choose 5
people, X of them will support reforms.
The Binomial Distribution: Problem
Chapter 5
example
 Chapter 5
Mean and Standard Deviation of the Binomial
Distribution

The mean, 𝜇, of the binomial distribution is equal to the sample size, 𝑛, multiplied by
the probability of an event of interest, 𝑝.
𝜇 =𝐸 𝑋 =𝑛∙𝑝

The standard deviation of the binomial distribution can be calculated using the
following formula

𝜎= 𝜎2 = 𝑛p(1 − p )
 Chapter 5
The Binomial Distribution
Shape

• The shape of the binomial

P(X=x|5, 0.1)
distribution depends on .6
the values of π and n .4
.2
 Here, n = 5 and π = .1 0
0 1 2 3 4 5 x

P(X=x|5, 0.5)
.6
.4
 Here, n = 5 and π = .5 .2
0
0 1 2 3 4 5 x
 Chapter 5
Poisson Distribution

The mean number of defective products produced in a factory in one day is 21. What is
the probability that in a given day there are exactly 12 defective products?

Consider, in an office 15 customers arrived today. Calculate the possibilities for exactly 10
customers to be arrived on tomorrow.

During a typical football game, a coach can expect 3.2 injuries. Find the probability that the
team will have at most 1 injury in this game.

A small life insurance company has determined that on the average it receives 6 car
accident claims per day. Find the probability that the company receives at least seven
claims on a randomly selected day.
 Chapter 5
Poisson Distribution

Many studies are based on counts of the times a particular event occurs in a given area of opportunity. An area

of opportunity is a continuous unit or interval of time, volume, or any physical area in which there can be more

than one occurrence of an event. Examples: the number of network failures in a day, the number of people

arriving at a bank, etc.

You can use the Poisson distribution to calculate probabilities in situations such as these if the following

properties hold:

- You are interested in counting the number of times a particular event occurs in a given area of
opportunity.

- The probability that an event occurs in a given area of opportunity is the same for all the areas of
opportunity.

- The number of events that occur in one area of opportunity is independent from the number of events
that occur in any other area of opportunity.

- The probability that two or more events will occur in an area of opportunity approaches zero as the area
of opportunity becomes smaller.
 Chapter 5
Poisson Distribution

The Poisson distribution has one characteristic, λ, which is the mean or expected number of
events per unit.

𝑒 −λ λ𝑥
𝑃 𝑋=𝑥 λ =
𝑥!
𝑃 𝑋 = 𝑥 λ - the probability, that 𝑋 = 𝑥 events in an area of opportunity given λ

λ – the expected number of events

𝑒 – mathematical constant approximated by 2.71828

𝑥 – number of events (𝑥 = 0, 1, 2, … , ∞)
 Chapter 5
Poisson Distribution Characteristics

Mean 𝜇=λ

Standard Deviation 𝜎= λ

where  = expected number of events

 Chapter 5
Poisson Distribution

In an urban county, health care officials anticipate that the number of births this year will
be the same as last year, when 438 children were born.
Daily births have been distributed according to the Poisson distribution.

Find the probability that:

On a random day 1 child will born
2 children will born
More than 3 children will born
 Chapter 5
Poisson Distribution
 Chapter 5
Poisson Distribution Shape

The shape of the Poisson Distribution depends on the parameter  :

0.70
 = 0.50 0.25
 = 3.00
0.60
0.20
0.50

0.15
0.40

P(x)
P(x)

0.30 0.10

0.20
0.05
0.10

0.00 0.00
0 1 2 3 4 5 6 7 1 2 3 4 5 6 7 8 9 10 11 12

x x