EIB-504 Spring 24 Lecture 3

LECTURE 3
A Survey of Probability Concepts

Statistical Techniques in Business & Economics
Lind, D. A., Marchal, W. G., and Wathen, S. A.
18th Edition (2020)
Chapter 5
Business Statistics Saiful Islam

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Executive MBA Program, 1st Semester 2024 Dept. of International Business
Lecture Overview
• Define probability, experiment, event, outcome, permutations, and
combinations
• The classical, empirical, and subjective approaches to probability.
• Define the terms conditional probability and joint probability.
• Rules of addition and rules of multiplication.
• Apply a tree diagram to organize and compute probabilities.
• Calculate a probability using Bayes’ theorem.

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Why Learn Probability?
• Nothing in life is certain. In everything we do, we gauge the chances
of successful outcomes, from business to medicine to the weather
• A probability provides a quantitative description of the chances or
likelihoods associated with various outcomes
• It provides a bridge between descriptive and inferential statistics
Probability
Population Sample
Statistics

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Why Learn Probability?
• Descriptive statistics is the • Inferential statistics is a
methods of organizing, decision, estimate, prediction, or
summarizing, and presenting generalization about a
data in an informative way. population, based on a sample.
• For example, according to the • For example, In 2021, a
Bureau of Labor Statistics, the vaccination for COVID-19 was
average hourly earnings of freely available. Now, what is the
production workers was $35 for proportion of people that did not
April 2018. get the vaccine?

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Probabilistic Reasoning and Statistical Reasoning
• Probabilistic reasoning happens • Statistical reasoning may involve
in the real world, where the connecting one concept to
certainty of something is not another (e.g., understanding the
confirmed, such as "It will rain relationship between the mean
today". and standard deviation in a
• These are probable sentences distribution) or may combine
for which we can assume that it ideas about data and chance.
will happen but not sure about
it, so here we use probabilistic
reasoning.

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Basic Concepts
• An experiment is the process by which an observation (or
measurement) is obtained.
• An event is an outcome of an experiment, usually denoted by a
capital letter.
• The basic element to which probability is applied
• When an experiment is performed, a particular event either happens, or it
doesn’t!

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Probability
• A probability is a measure of the likelihood that an event in the future
will happen. It can only assume a value between 0 and 1.
• A value near zero means the event is not likely to happen. A value
near one means it is likely.
• There are three ways of
assigning probability:
• Classical,
• Empirical, and
• Subjective

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Experiments, Events and Outcomes
• An experiment is the
observation of some
activity or the act of taking
some measurement.
• An outcome is the
particular result of an
experiment.
• An event is the collection
of one or more outcomes
of an experiment.
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Assigning Probabilities
• Three approaches to assigning probabilities
• Classical
• Empirical
• Subjective

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Classical Probability
• Consider an experiment of rolling a six-sided die. What is the probability of the

event “an even number of spots appear face up”?
• The possible outcomes are:
• There are three “favorable” outcomes (a two, a four, and a six) in the collection of
six equally likely possible outcomes.
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Mutually Exclusive and Collectively Exhaustive Events
• Events are mutually exclusive if • Events are collectively
the occurrence of any one exhaustive if at least one of the
event means that none of the events must occur when an
others can occur at the same experiment is conducted.
time.
• Events are independent if the
occurrence of one event does
not affect the occurrence of
another.

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Empirical Probability
• The empirical approach to probability is based on what is called the

law of large numbers. The key to establishing probabilities empirically
is that more observations will provide a more accurate estimate of
the probability.

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The Empirical Rule

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Law of Large Numbers
• Suppose we toss a fair coin. The result of each toss is either a head or a tail. If we
toss the coin a great number of times, the probability of the outcome of heads
will approach .5. The following table reports the results of an experiment of
flipping a fair coin 1, 10, 50, 100, 500, 1,000 and 10,000 times and then
computing the relative frequency of heads

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Empirical Probability - Example
• On February 1, 2003, the Space Shuttle Columbia exploded. This was the second
disaster in 113 space missions for NASA. On the basis of this information, what is
the probability that a future mission is successfully completed?
Number of successful flights

Probability of a successful flight 
Total number of flights
111
  0.98
113

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Subjective Probability - Example
• If there is little or no past experience or information on which to base a

probability, it may be arrived at subjectively.
• Illustrations of subjective probability are:
1. Estimating the likelihood the New England Patriots will play in the Super Bowl next year.
2. Estimating the likelihood you will be married before the age of 30.
3. Estimating the likelihood the U.S. budget deficit will be reduced by half in the next 10
years.

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Summary of Types of Probability

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Characteristics of a Normal Probability Distribution
• It is bell-shaped and has a single peak
at the center of the distribution.
• The arithmetic mean, median, and
mode are equal
• The total area under the curve is 1.00;
half the area under the normal curve
is to the right of this center point and
the other half to the left of it.
• It is symmetrical about the mean.

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• It is asymptotic: The curve gets closer
and closer to the X-axis but never
actually touches it. To put it another
way, the tails of the curve extend
indefinitely in both directions.
• The location of a normal distribution
is determined by the mean, , the
dispersion or spread of the
distribution is determined by the
standard deviation, σ .

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The Standard Normal Probability Distribution
• The standard normal distribution is a normal distribution with a mean of 0 and a
standard deviation of 1.
• It is also called the z distribution.
• A z-value is the distance between a selected value, designated X, and the
population mean , divided by the population standard deviation, σ.
• The formula is:

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Areas Under the Normal Curve

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The Normal Distribution – Example
• The weekly incomes of shift foremen in
the glass industry follow the normal
probability distribution with a mean of
$1,000 and a standard deviation of $100.
What is the z value for the income, let’s
call it X, of a foreman who earns $1,100
per week? For a foreman who earns
$900 per week?

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The Empirical Rule
• About 68 percent of the area under
the normal curve is within one
standard deviation of the mean.
• About 95 percent is within two
standard deviations of the mean.
• Practically all is within three standard
deviations of the mean.

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The Empirical Rule - Example
• As part of its quality assurance program, the
Autolite Battery Company conducts tests on
battery life. For a particular D-cell alkaline
battery, the mean life is 19 hours. The useful
life of the battery follows a normal distribution
with a standard deviation of 1.2 hours.
• Answer the following questions.
• About 68 percent of the batteries failed
between what two values?
• About 95 percent of the batteries failed
between what two values?
• Virtually all of the batteries failed between
what two values?

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Normal Distribution – Finding Probabilities
• In an earlier example we reported that
the mean weekly income of a shift
foreman in the glass industry is
normally distributed with a mean of
$1,000 and a standard deviation of
$100.
• What is the likelihood of selecting a
foreman whose weekly income is
between $1,000 and $1,100?

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Normal Distribution – Finding Probabilities

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Normal Distribution – Finding Probabilities (Example 2)
Refer to the information regarding the
weekly income of shift foremen in the
glass industry. The distribution of
weekly incomes follows the normal
$100.
What is the probability of selecting a
shift foreman in the glass industry
whose income is:
Between $790 and $1,000?

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$100.
whose income is:
Less than $790?

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$100.
whose income is:
Between $840 and $1,200?

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$100.
whose income is:
Between $1,150 and $1,250

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Counting Rules - Permutation
• A permutation is any arrangement of r objects selected from n possible objects.
The order of arrangement is important in permutations.
• Suppose that in addition to selecting the group, he must also rank each of the
players in that starting lineup according to their ability.
12!
12 P 5   95,040
(12  5)!
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Counting - Combination
• A combination is the number of ways to choose r objects from a group of n
objects without regard to order.
• There are 12 players on the Carolina Forest High School basketball team. Coach
Thompson must pick five players among the twelve on the team to comprise the
starting lineup. How many different groups are possible?
12!
12 C5   792
5!(12  5)!
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End of Lecture 3
* All clipart, image and graphics are sourced from Google webpage

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LECTURE 3

A Survey of Probability Concepts

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

• Consider an experiment of rolling a six-sided die. What is the probability of the

Business Statistics Saiful Islam

• The empirical approach to probability is based on what is called the

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Number of successful flights

Business Statistics Saiful Islam

• If there is little or no past experience or information on which to base a

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

Business Statistics Saiful Islam

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