Theory of Probability

Probability Theory
UNIT - I
Probability Distributions

Ms. Shaheen, Asst. Professor, IPE, OU

Campus, Hyd - 7 1
Contents
1. Introduction
2. Simple Definitions
3. Types of Probability
4. Theorems of Probability
5. Probabilities under conditions of statistically
independent events
6. Probabilities under conditions of statistically
dependent events
7. Bayes Theorem
8. Glossary of Terms
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Introduction
If an experiment is repeated under essentially
homogeneous & similar conditions we generally
come across 2 types of situations:

Deterministic/ Predictable: - The result of what

is usually known as the outcome is unique or
certain.

Example:- The velocity v of a particle after time t

is given by
v = u + at
Equation uniquely determines v if the right-hand
quantities are known.

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 Unpredictable/ Probabilistic: - The result is not
unique but may be one of the several possible
outcomes.

Examples: -

(i) In tossing of a coin one is not sure if a head or a

tail will be obtained.

(ii) If a light tube has lasted for t hours, nothing can

be said about its further life. It may fail to
function any moment.

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Simple Definitions
Trial & Event

Example: - Consider an experiment which, though

repeated under essentially identical conditions, does
not give unique results but may result in any one of the
several possible outcomes.

Experiment is known as a Trial & the outcomes are

known as Events or Cases.
Throwing a die is a Trial & getting 1 (2,3,,6) is an
event.
Tossing a coin is a Trial & getting Head (H) or Tail (T)
is an event.

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 Exhaustive Events: - The total number of possible
outcomes in any trial.
In tossing a coin there are 2 exhaustive cases, head &
tail.
In throwing a die, there are 6 exhaustive cases since
any one of the 6 faces 1,2,,6 may come uppermost.

Experiment Collectively Exhaustive Events

In a tossing of an unbiased coin
In a throw of an unbiased cubic
die
In drawing a card from a well
shuffled standard pack of playing
cards
Possible solutions Head/ Tail
Exhaustive no. of cases 2
Possible solutions 1,2,3,4,5,6
Exhaustive no. of cases 6
Possible solutions Ace to King
Exhaustive no. of cases 52

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 Favorable Events/ Cases: - It is the number of
outcomes which entail the happening of an event.
In throwing of 2 dice, the number of cases favorable to
getting the sum 5 is:
(1,4), (4,1), (2,3), (3,2).
In drawing a card from a pack of cards the number of
cases favorable to drawing an ace is 4, for drawing a
spade is 13 & for drawing a red card is 26.

Independent Events: - If the happening (or non-

happening) of an event is not affected by the
supplementary knowledge concerning the occurrence
of any number of the remaining events.
In tossing an unbiased coin the event of getting a head in
the first toss is independent of getting a head in the
second, third & subsequent throws.

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 Mutually exclusive Events: - If the happening of any
one of the event precludes the happening of all the
others.
In tossing a coin the events head & tail are mutually
exclusive.
In throwing a die all the 6 faces numbered 1 to 6 are
mutually exclusive since if any one of these faces comes,
the possibility of others, in the same trial, is ruled out.

Experiment Mutually Exclusive Events

In a tossing of an unbiased Head/ Tail
coin
In a throw of an unbiased Occurrence of 1 or 2 or 3 or 4 or 5 or
cubic die 6
In drawing a card from a well Card is a spade or heart
shuffled standard pack of Card is a diamond or club
playing cards Card is a king or a queen

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 Equally likely Events: - Outcomes of a trial are said to
be equally likely if taken into consideration all the relevant
evidences, there is no reason to expect one in preference
to the others.
In tossing an unbiased coin or uniform coin, head or tail are
equally likely events.
In throwing an unbiased die, all the 6 faces are equally likely
to come.

Experiment Collectively Exhaustive Events

In a tossing of an unbiased
coin
In a throw of an unbiased
cubic die
In drawing a card from a well
shuffled standard pack of
playing cards
Head is likely to come up as a Tail
Any number out of 1,2,3,4,5,6 is
likely to come up
Any card out of 52 is likely to come
up

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 Probability: Probability of a given event is an
expression of likelihood of occurrence of an event.
Probability is a number which ranges from 0 to 1.
Zero (0) for an event which cannot occur and 1 for an
event which is certain to occur.

Importance of the concept of Probability

Probability models can be used for making predictions.

Probability theory facilitates the construction of
econometric model.
It facilitates the managerial decisions on planning and
control.

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Types of Probability

There are 3 approaches to probability, namely:

1. The Classical or a priori probability

2. The Statistical or Empirical probability
3. The Axiomatic probability

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Mathematical/ Classical/ a priori Probability
Basic assumption of classical approach is that the
outcomes of a random experiment are equally
likely.

According to Laplace, a French Mathematician:

Probability, is the ratio of the number of favorable cases
to the total number of equally likely cases.

If the probability of occurrence of A is denoted by

p(A), then by this definition, we have:
Number of favorable cases m
p = P(E) = ------------------------------ = ----
Total number of equally likely cases n

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 Probability p of the happening of an event is also
known as probability of success & q the non-
happening of the event as the probability of failure.

If P(E) = 1, E is called a certain event &

if P(E) = 0, E is called an impossible event

The probability of an event E is a number such that

0 P(E) 1, & the sum of the probability that an
event will occur & an event will not occur is equal to
1.
i.e., p + q = 1

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Limitations of Classical definition
Classical probability is often called a priori probability
because if one keeps using orderly examples of
unbiased dice, fair coin, etc. one can state the
answer in advance (a priori) without rolling a dice,
tossing a coin etc.

Classical definition of probability is not very

satisfactory because of the following reasons:
It fails when the number of possible outcomes of the
experiment is infinite.
It is based on the cases which are equally likely and
as such cannot be applied to experiments where the
outcomes are not equally likely.
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 It may not be possible practically to enumerate
all the possible outcomes of certain experiments
and in such cases the method fails.

Example it is inadequate for answering questions

such as: What is the probability that a man aged
45 will die within the next year?

Here there are only 2 possible outcomes, the

individual will die in the ensuing year or he will live.
The chances that he will die is of course much
smaller than he will live.

How much smaller?

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Relative/ Statistical/ Empirical Probability
Probability of an event is determined objectively by repetitive
empirical observations/ Experiments. Probabilities are assigned
a posterior.

According to Von Mises If an experiment is performed

repeatedly under essentially homogeneous conditions and
identical conditions, then the limiting value of the ratio of the
number of times the event occurs to the number of trials, as the
number of trials becomes indefinitely large, is called the
probability of happening of the event, it being assumed that the
limit is finite and unique.
Example: - When a coin is tossed, what is the probability that the
coin will turn heads?
Suppose coin is tossed for 50 times & it falls head 20 times, then
the ratio 20/50 is used as an estimate of the probability of heads
of this coin.

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 Symbolically, if in n trials an event E happens m
times, then the probability p of the happening of E
is given by
m
p = P(E) = Lt ----
N -> N

In this case, as the number of trails increase

probabilities of outcomes move closer to the real
probabilities and tend to be real probabilities as the
number of trails tends to infinity (a large number).

The empirical probability approaches the classical

probability as the number of trails becomes
indefinitely large.
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Limitations of Statistical/ Empirical method
The Empirical probability P(A) defined earlier can never
be obtained in practice and we can only attempt at a
close estimate of P(A) by making N sufficiently large.

The experimental conditions may not remain essentially

homogeneous and identical in a large number of
repetitions of the experiment.

The relative frequency of m/N, may not attain a unique

value, no matter however large N may be.

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The Axiomatic Approach
Modern theory of probability is based on the axiomatic
approach introduced by the Russian Mathematician A. N.
Kolmogorov in 1930s.

Classical approach restricts the calculation of probability to

essentially equally likely & mutually exclusively events.

Empirical approach requires that every question be

examined experimentally under identical conditions, over a
long period of time considering repeated observations.

Axiomatic approach is largely free from the inadequacies of

both the classical & empirical approaches.

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 Given a sample space of a random experiment, the
probability of the occurrence of any event A is defined as a
set function P(A) satisfying the following axioms.
1. Axiom 1: - P(A) is defined, is real and non-negative i.e.,
P(A) 0 (Axiom of non-negativity)
2. Axiom 2: - P(S) = 1 (Axiom of certainty)
3. Axiom 3: - If A1, A2, ., An is any finite or infinite sequence of
disjoint events of S, then
n n
P ( U Ai) = P( Ai )
i=1 i=1

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The Objective and Subjective Approach

Objective approach to probability is arrived on

opinion basis or an empirical basis.
It is given by the ratio of frequency of an outcome to the total
number of possible outcomes.

Subjective approach to probability is not concerned

with the relative or expected frequency of an
outcome.
It is concerned with the strength of a decision makers belief
that an outcome will not occur.
It is particularly oriented towards decision-making situations.

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Theorems of Probability

There are 2 important theorems of probability

which are as follows:

The Addition Theorem and

The Multiplication Theorem

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Addition theorem when events are Mutually Exclusive

Definition: - It states that if 2 events A and B are

mutually exclusive then the probability of the occurrence
of either A or B is the sum of the individual probability of
A and B.
Symbolically
P(A or B) or P(A U B) = P(A) + P(B)

The theorem can be extended to three or more mutually

exclusive events. Thus,
P(A or B or C) = P(A) + P(B) + P(C)

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Addition theorem when events are not Mutually
Exclusive (Overlapping or Intersection Events)

Definition: - It states that if 2 events A and B are not

mutually exclusive then the probability of the occurrence
of either A or B is the sum of the individual probability of
A and B minus the probability of occurrence of both A
and B.
Symbolically

P(A or B) or P(A U B) = P(A) + P(B) P(A B)

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Multiplication theorem

Definition: States that if 2 events A and B are

independent, then the probability of the occurrence of
both of them (A & B) is the product of the individual
probability of A and B.
Symbolically,
Probability of happening of both the events:
P(A and B) or P(A B) = P(A) x P(B)

Theorem can be extended to 3 or more independent

events. Thus,
P(A, B and C) or P(A B C) = P(A) x P(B) x P(C)

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How to calculate probability in case of Dependent
Events
Case Formula

1. Probability of occurrence of at least A or B

1. When events are mutually P(A U B) = P(A) + P(B)

2. When events are not mutually exclusive P(A U B) = P(A) + P(B) P(A B)

2. Probability of occurrence of both A & B P(A B) = P(A) + P(B) P(A U B)

3. Probability of occurrence of A & not B P(A B) = P(A) - P(A B)

4. Probability of occurrence of B & not A P(A B) = P(B) - P(A B)

5. Probability of non-occurrence of both A & B P(A B) = 1 - P(A U B)

6. Probability of non-occurrence of atleast A or B P(A U B) = 1 - P(A B)

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How to calculate probability in case of Independent
Events
Case Formula
1. Probability of occurrence of both A & B P(A B) = P(A) x P(B)

2. Probability of non-occurrence of both A & P(A B) = P(A) x P(B)

B
P(A B) = P(A) x P(B)
3. Probability of occurrence of A & not B
P(A B) = P(A) x P(B)
4. Probability of occurrence of B & not A
P(A U B) = 1 - P(A B) = 1 [P(A) x P(B)]
5. Probability of occurrence of atleast one
event

P(A U B) = 1 - P(A B) = 1 [P(A) x P(B)]

6. Probability of non-occurrence of atleast
one event
P(A B) + P(A B) = [P(A) x P(B)] +
7. Probability of occurrence of only one
event [P(A) x P(B)]

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 Problem
An inspector of the Alaska Pipeline has the task of
comparing the reliability of 2 pumping stations. Each
station is susceptible to 2 kinds of failure: Pump failure &
leakage. When either (or both) occur, the station must be
shut down. The data at hand indicate that the following
probabilities prevail:

Station P(Pump failure) P(Leakage) P(Both)

1 0.07 0.10 0
2 0.09 0.12 0.06
Which station has the higher probability of being shut
down.
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Solution

P(Pump failure or Leakage)

= P(Pump Failure) + P(Leakage Failure)
P(Pump Failure Leakage Failure)

Station 1: 0.07 + 0.10 0 = 0.17

Station 2: 0.09 + 0.12 0.06 = 0.15

Thus, station 1 has the higher probability of being shut down.

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Probability Rules

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Probabilities under conditions of Statistical
Independence

Statistically Independent Events: - The

occurrence of one event has no effect on the
probability of the occurrence of any other event.

Most managers who use probabilities are

concerned with 2 conditions.
1. The case where one event or another will occur.
2. The situation where 2 or more events will both occur.

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 There are 3 types of probabilities under statistical
independence.
Marginal
Joint
Conditional

Marginal/ Unconditional Probability: - A single probability

where only one event can take place.

Joint probability: - Probability of 2 or more events

occurring together or in succession.

Conditional probability: - Probability that a second event

(B) will occur if a first event (A) has already happened.

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 Example: Marginal Probability - Statistical Independence

A single probability where only one event can take place.

Marginal Probability of an Event

P(A) = P(A)

Example 1: - On each individual toss of an biased or unfair

coin, P(H) = 0.90 & P(T) = 0.10. The outcomes of several
tosses of this coin are statistically independent events too,
even tough the coin is biased.

Example 2: - 50 students of a school drew lottery to see which

student would get a free trip to the Carnival at Goa. Any one
of the students can calculate his/ her chances of winning as:
P(Winning) = 1/50 = 0.02

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 Example: Joint Probability - Statistical Independence

The probability of 2 or more independent events occurring

together or in succession is the product of their marginal
probabilities.
Joint Probability of 2 Independent Events
P(AB) = P(A) * P(B)

Example: - What is the probability of heads on 2 successive

tosses?
P(H1H2) = P(H1) * P(H2)
= 0.5 * 0.5 = 0.25
The probability of heads on 2 successive tosses is 0.25, since
the probability of any outcome is not affected by any
preceding outcome.
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 We can make the probabilities of events even more explicit using a Probabilistic
Tree.

1 Toss 2 Toss 3 Toss

H1 0.5 H 1H 2 0.25 H 1H 2H 3 0.125

T1 0.5 H1T2 0.25 H1H2T3 0.125
T1 H 2 0.25 H 1 T2 H 3 0.125
T1T2 0.25 H1T2T3 0.125
T1H2H3 0.125
T1H2T3 0.125
T1T2H3 0.125
T1T2T3 0.125

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 Example: Conditional Probability - Statistical Independence

For statistically independent events, conditional probability of

event B given that event A has occurred is simply the
probability of event B.

Conditional Probability for 2 Independent Events

P(B|A) = P(B)

Example: - What is the probability that the second toss of a

fair coin will result in heads, given that heads resulted on the
first toss?
P(H2|H1) = 0.5
For 2 independent events, the result of the first toss have
absolutely no effect on the results of the second toss.

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Probabilities under conditions of Statistical
Dependence
Statistical Dependence exists when the probability of
some event is dependent on or affected by the
occurrence of some other event.

The types of probabilities under statistical dependence

are:
Marginal
Joint
Conditional

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 Example
Assume that a box contains 10 balls distributed as follows: -
Event Probability of Event
3 are colored & dotted
1 0.1
1 is colored & striped
2 0.1 Colored & Dotted
2 are gray & dotted
4 are gray & striped 3 0.1
4 0.1 Colored & Striped
5 0.1
6 0.1 Gray & Dotted

7 0.1
8 0.1
Gray & Striped
9 0.1
10 0.1

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 Example: Marginal Probability - Statistically Dependent

It can be computed by summing up all the joint events in

which the simple event occurs.

Compute the marginal probability of the event colored.

It can be computed by summing up the probabilities of

the two joint events in which colored occurred:

P(C) = P(CD) + P(CS)

= 0.3 + 0.1
=0.4
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 Example: Joint Probability - Statistically Dependent

Joint probabilities under conditions of statistical

dependence is given by
Joint probability for Statistically Dependent Events
P(BA) = P(B|A) * P(A)

What is the probability that this ball is dotted and

colored?
Probability of colored & dotted balls =
P(DC) = P(D|C) * P(D)
= (0.3/0.4) * 0.5
= 0.3 (Approximately)

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 Example: Conditional Probability - Statistically Dependent

Given A & B to be the 2 events then,

Conditional probability for Statistically Dependent Events
P(BA)
P(B|A) = ----------
P(A)

What is the probability that this ball is dotted, given that it

is colored?

The probability of drawing any one of the ball from this box is 0.1
(1/10) [Total no. of balls in the box = 10].

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We know that there are 4 colored balls, 3 of which
are dotted & one of it striped.
P(DC) 0.3
P(D|C) = --------- = ------
P(C) 0.4
= 0.75

P(DC) = Probability of colored & dotted balls

(3 out of 10 --- 3/10)
P(C) = 4 out of 10 --- 4/10

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 Revising Prior Estimates of Probabilities:
Bayes Theorem

A very important & useful application of conditional

probability is the computation of unknown probabilities,
based on past data or information.

When an event occurs through one of the various

mutually disjoint events, then the conditional probability
that this event has occurred due to a particular reason or
event is termed as Inverse Probability or Posterior
Probability.

Has wide ranging applications in Business & its

Management.
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 Since it is a concept of revision of probability based on
some additional information, it shows the improvement
towards certainty level of the event.

Example 1: - If a manager of a boutique finds that most

of the purple & white jackets that she thought would sell
so well are hanging on the rack, she must revise her
prior probabilities & order a different color combination or
have a sale.

Certain probabilities were altered after the people got

additional information. New probabilities are known as
revised, or Posterior probabilities.

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Bayes Theorem

If an event A can occur only in conjunction with n mutually

exclusive & exhaustive events B1, B2, , Bn, & if A actually
happens, then the probability that it was preceded by an event
Bi (for a conditional probabilities of A given B1, A given B2 A
given Bn are known) & if marginal probabilities P(Bi) are also
known, then the posterior probability of event Bi given that
event A has occurred is given by:

P(A | Bi). P(Bi)

P(Bi | A) = ----------------------
P(A | Bi). P(Bi)

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Remarks: -

The probabilities P(B1), P(B2), , P(Bn) are termed as

the a priori probabilities because they exist before we
gain any information from the experiment itself.

The probabilities P(A | Bi), i=1,2,,n are called

Likelihoods because they indicate how likely the
event A under consideration is to occur, given each &
every a priori probability.

The probabilities P(Bi | A), i=1, 2, ,n are called

Posterior probabilities because they are determined
after the results of the experiment are known.
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 Problem

In a bolt factory machines A, B, & C manufacture

respectively 25%, 35%, & 40% of the total. Of their
output 5%, 4%, 2% are defective bolts. A bolt is drawn at
random from the product & Is found to be defective.

What are the probabilities that it was manufactured by

machines A, B & C?

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 Solution
Let E1, E2, E3 denote the events manufactured by
machines A, B & C respectively.
Let E denote the event of its being defective.
P(E1) = 0.25; P(E2) = 0.35; P(E3) = 0.40;
Probability of drawing a defective bolt manufactured by
machine A is P(E|E1) = 0.05
Similarly P(E|E2) = 0.04; P(E|E3) = 0.02
Probability that defective bolt selected at random is
manufactured by machine A is given by

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 P(E1). P(E|E1)
P(E1|E) = ------------------------
P(E1). P(E|E1)
i=1 to 3

0.25*0.05
= ----------------------------------------------
0.25*0.05 + 0.35*0.04 + 0.40*0.02
= 25/69

Similarly P(E2|E) = 28/69

= [(0.35*0.04)/(.25*.05+.35*.04+.40*.02)]
P(E3|E) = 16/69
= [(0.40*0.02)/(.25*.05+.35*.04+.40*.02)]
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Glossary of terms
Classical Probability: It is based on the idea that certain
occurrences are equally likely.
Example: - Numbers 1, 2, 3, 4, 5, & 6 on a fair die are
each equally likely to occur.
Conditional Probability: The probability that an event
occurs given the outcome of some other event.
Independent Events: Events are independent if the
occurrence of one event does not affect the occurrence of
another event.
Joint Probability: Is the likelihood that 2 or more events will
happen at the same time.
Multiplication Formula: If there are m ways of doing one
thing and n ways of doing another thing, there are m x n
ways of doing both.

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 Mutually exclusive events: A property of a set of categories
such that an individual, object, or measurement is included in
only one category.
Objective Probability: It is based on symmetry of games of
chance or similar situations.
Outcome: Observation or measurement of an experiment.
Posterior Probability: A revised probability based on
additional information.
Prior Probability: The initial probability based on the present
level of information.
Probability: A value between 0 and 1, inclusive, describing
the relative possibility (chance or likelihood) an event will
occur.
Subjective Probability: Synonym for personal probability.
Involves personal judgment, information, intuition, & other
subjective evaluation criteria.
Example: - A physician assessing the probability of a
patients recovery is making a personal judgment based on
what they know and feel about the situation.
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