Poisson Process With Applications

Business Analytics Presentation

Group 9: Aashruti Babbar, Aman Gupta, Divashi Mittal,

Garima Pahwa, Harsh Saxena
Table of Contents

1. INTRODUCTION

2. POISSON PROCESS CRITERIA

3. POISSON DISTRIBUTION

4. WHY WE NEED POISSON DISTRIBUTION?

5. REQUIREMENTS AND CONDITIONS OF POISSON

6. APPLICATIONS OF POISSON PROCESS

7. BUSINESS USES OF POISSON PROCESS

Introduction
A Poisson Process is a model for a series of discrete events where the average
time between events is known, but the exact timing of events is random. 

The arrival of an event is independent of the event before (waiting time between
events is memoryless).

For example:
Suppose we own a website which our content delivery network (CDN) tells us goes
down on average once per 60 days, but one failure doesn’t affect the probability of the
next. All we know is the average time between failures.
The important point is we know the average time between events but they are randomly
spaced (stochastic). We might have back-to-back failures, but we could also go years
between failures due to the randomness of the process.
Poisson Process Criteria
A Poisson Process meets the following criteria:

• Events are independent of each other. The occurrence of one event does not affect the
probability that another event will occur.
• The average rate (events per time period) is constant.
• Two events cannot occur at the same time.

Common examples of Poisson processes are customers calling a help center, visitors to a

website, radioactive decay in atoms, photons arriving at a space telescope, and
movements in a stock price.

Poisson processes are generally associated with time, but they do not have to be. In the
stock case, we might know the average movements per day (events per time), but we
could also have a Poisson process for the number of trees in an acre (events per area).
 Poisson Distribution
The Poisson Process is the model we use for describing randomly occurring events and by
itself, isn’t that useful. We need the Poisson Distribution to do interesting things like finding
the probability of a number of events in a time period or finding the probability of waiting
some time until the next event.
The Poisson Distribution probability mass function gives the probability of observing k events
in a time period given the length of the period and the average events per time:

This is a little convoluted, and events/time * time period is usually simplified into a single
parameter, λ, lambda, the rate parameter. With this substitution, the Poisson Distribution
probability function now has one parameter:
As we change the rate parameter, λ, we change the probability of seeing different numbers of
events in one interval. The below graph is the probability mass function of the Poisson
distribution showing the probability of a number of events occurring in an interval with
different rate parameters.
Example of Poisson Distribution

Que. In the World Cup, an average of

2.5 goals are scored in each game.
Modeling this situation with a Poisson
distribution, what is the probability that
k goals are scored in a game?

Sol. In this instance, λ = 2.5. The above

formula applies directly:
Why we need Poisson Distribution?

Poisson distribution used in cases where the chance of any individual event being a
success is very small. The distribution is used to describe the behavior of rare events.

The Poisson distribution is commonly used to model financial count data where the tally
is small and is often zero.

Examples:

• The number of defective screws per box of 5000 screws.

• The number of printing mistakes in each page of the first proof of book. 
• The number of air accidents in India in one year.
• Occurrence of number of scratches on a sheet of glass. 
Requirements of Poisson

• The random variable X should be discrete.

• A dichotomy exists, i.e. happening of the event must be of two alternatives such as
success & failure.
• Statistical independence is assumed.
• The rate parameter λ should be greater than 0.
Conditions of Poisson

• An event can occur any number of times during a time period.

• Events occur independently. In other words, if an event occurs, it does not affect the
probability of another event occurring in the same time period.

• The rate of occurrence is constant; that is, the rate does not change based on time.

• The probability of an event occurring is proportional to the length of the time period.
For example, it should be twice as likely for an event to occur in a 2 hour time period
than it is for an event to occur in a 1 hour period.
Conditions of Poisson Example
The Poisson distribution is appropriate for modeling the number of phone calls an office
would receive during the noon hour, if they know that they average 4 calls per hour
during that time period.

• Although the average is 4 calls, they could theoretically get any number of calls
during that time period.
• The events are effectively independent since there is no reason to expect a caller to
affect the chances of another person calling.
• The occurrence rate may be assumed to be constant.
• It is reasonable to assume that (for example) the probability of getting a call in the
first half hour is the same as the probability of getting a call in the final half hour.
Applications of Poisson Process

Poisson process is used to model the occurrences of events and the time points at which
the events occur in a given time interval, such as the occurrence of natural disasters and
the arrival times of customers at a service center.

Some other specific applications are:

• Particle processes and Radioactive Decay

• Photon arrivals from a weak source
• Financial market shocks
• Placement of phone calls, service requests etc.
Business Uses of Poisson

Calls in a Call Center

A call center receives an average of 4.5 calls

every 5 minutes. Each agent can handle one
of these calls over the 5 minute period. If a
call is received, but no agent is available to
take it, then that caller will be placed on
hold. Assuming that the calls follow a
Poisson distribution, what is the minimum
number of agents needed on duty so that
calls are placed on hold at most 10% of the
time?
Business Uses of Poisson (Contd.)

Customer Arrivals
The number of customers arriving at a grocery store
can be modeled by a Poisson process with intensity λ
= 10 customers per hour. Find the probability that
there are 2 customers between 10:00 and 10:20.
Business Uses of Poisson (Contd.)
Review and evaluate business insurance coverage.
Determine the average number of losses or claims that occur
each year and that are covered by the company’s business
insurance. Then do a Poisson probability calculation to determine
the maximum and minimum numbers of claims that might
reasonably be filed during any one year.
Review the cost of your insurance and the coverage it provides.
Consider whether perhaps you’re overpaying – that is, paying for
a coverage level that you probably don’t need, given the probable
maximum number of claims.
Alternatively, you may find that you’re underinsured – that if
what the Poisson distribution shows as the probable highest
number of claims actually occurred one year, your insurance
coverage would be inadequate to cover the losses.
Conclusion
To summarize :

• A Poisson Distribution gives the probability of a number of events in an interval

generated by a Poisson process.

• The Poisson distribution is defined by the rate parameter, λ, which is the expected
number of events in the interval (events/interval * interval length) and the highest
probability number of events.

• We can also use the Poisson Distribution to find the waiting time between events.

• Even if we arrive at a random time, the average waiting time will always be the
average time between events.
Thank You