DATA ANALYSIS, TOOLS AND

APPLICATION (QHO430)

Lecture 2 – On balance of all probabilities

Introduction
Why study probability?

Businesses often need to make decisions in the face of uncertainty.

 Will a business strategy be successful and beneficial?

 Will a product launch be completed in time for an exhibition?

 What proportion of customers will claim under guarantee?

 How likely is it that a customer will give positive feedback?

 Introduction to Probability
In business, we need to quantify or measure uncertainty.
We can then make informed judgements, enabling us to provide answers to questions such
as those on the previous slide.

Probability is a numerical measure of the likelihood that an event will occur:

 The probability that a customer viewing an item online will go on to buy could be 40%
 The probability of a £2 ticket winning the jackpot in the National Lottery is very
unlikely (~0.00000007)
 The probability that the next Glastonbury festival will be a sell- out is very likely (100%).
Introduction to Topic (Cont.)
“Understanding probability is an essential part of Data Analysis and is used a lot in
RISK analysis and forecasting. This is also a big part of decision making in
organisations”

Probabilities are also used to determine rates of insurance on people’s lives, cars and
houses.
Generally we express probabilities as a number between 0 and 1 or as an equivalent
percentage or fraction. 

The sum of all probabilities adds up to 1. For example if the probability of an event
happening is x, then the probability of it not happening is 1-x
Introduction to Topic (Cont.)
Probability is measured on a scale from 0 to 1.

0 0.5 1
Impossible/ Certain/
has never happened always happens

We can use fractions, decimals or percentages.

3
e.g. 4 , 0.75 or 75%
Probability
 In business we usually use inferential statistics. This is where we make
conclusions based on sample results.

 The sample is only a subset of the population.

 There will be uncertainty in the results obtained

 We use probability to measure this uncertainty

Calculating Probabilities
There are three approaches to assessing the probability of an
uncertain event:
1. a priori or classical probability (rarely used in business)
Here we find a theoretical probability assuming all outcomes
are equally likely.
probability of occurrence = number of ways an event can occur
total number of outcomes
2. empirical or relative frequency probability
Here we look at the results from trials or samples:
probability of occurrence = number of favourable outcomes observed
total number of outcomes observed
Calculating Probabilities
There are three approaches to assessing the probability of an
uncertain event:
3. subjective probability
An individual judgment or opinion about the probability of
occurrence usually based on expert experience .
Calculating Probabilities
Classical Method Example
As part of a promotion, a toy store invites customers to roll
a die and gives a £10 discount vouchers to any who get a ‘6’.
What is the probability of getting 6?

•Solution:
– Sample Space ( all possible outcomes)
S = {1, 2, 3, 4, 5, 6}
– There is only one way that a 6 can occur
– P(getting a six) = 1/6
P is
‘probability’
Calculating Probabilities
•Relative Frequency Example
A department store monitors the methods of payment used by
customers. A sample of 200 customers gave the following results.

What is the probability that a customer paid by debit card?

• Solution
P(paid by debit card) = number who paid by debit card = = (= 0.45 or 45% )
total number
Calculating Probabilities
•Relative Frequency Example (continued)
A department store monitors the methods of payment used by
customers. A sample of 200 customers gave the following results.
Exercise
Calculate the probabilities for each of the payment methods.
What is the total of the probabilities?
Calculating Probabilities
•Relative Frequency Example (continued)
A department store monitors the methods of payment used by
customers. A sample of 200 customers gave the following results.

If we calculate the probabilities for each of the payment methods,

we note that they total 1 (=100%)
Calculating Probabilities
Subjective Method Examples
 In the music industry, record producers will use their expert judgement
and experience to assess the probability that a particular artist will be
successful.

 A marketer may ask a sample of retailers about the likely success of

some new packaging for a product. As with all sampling, the larger the
number taking part in the survey, the better the result.
Basic Probabilities Rules
• The probability of any event is at least zero.
There is no such thing as a negative probability .
• The probability of the entire outcome space is 1 (ie 100%)
(The outcome space contains every possible outcome.)
• If the probability that an event happens is p then
the probability that it does not happen is ( 1 – p )
Example 1
If the probability that a customer buys Ralux shower gel
is 0.55 (= 55%) then the probability she does not buy Ralux shower gel is:
P(does not buy Ralux) = 1 – P(buys Ralux)
= 1 – 0.55 (= 100% – 55%)
= 0.45 (= 45%)
basic Probabilities Rules
Exercise
In a promotion 30% of customers who send for a free copy of a magazine then buy a
subscription.

What is the probability that the customer does not buy a subscription?
Write your answer as a decimal.
Calculating Probabilities
So far, we have only considered the probability of a single event occurring.
Often, we need to know the probability of combinations of events .
Example 2:
A marketer carries out a survey to find out which promotion methods are used by local
businesses. In one question, she asks if businesses advertise in the local paper or on local
radio.
The diagram below shows the results from 20 replies.

N R
Local Newspaper (N)
8 4 3
Local Radio (R)
5
Additional Rule
Example 2: Survey on promotion methods used by 20 local businesses.

Local N R Local Radio

Newspaper only
only 8 4 3
Neither
5
Newspaper
nor Radio
Newspaper AND Radio

• P(Newspaper) = P(N) = (= 0.6)

Additional Rule

Exercise: Have a go at calculating the following

probabilities:

• P(Radio) = P(R) =

• P(Newspaper AND Radio) = P(N and R) =

• P(Newspaper OR Radio OR both) = P(N or R) =

1
9

.
N R R only
Example:
Survey on N only 8 4 3
promotion Neither
methods
5 N nor R
used by 20
local
businesses.
N and R

Recap: P(N) = P(R) = P(N and R) = P(N or R) =

Addition Rule: P(N or R) = P(N) + P(R) – P(N and R)

Using our example to demonstrate:
P(N or R) = + – =
Additional Rule
• The general addition rule is: P(A or B) = P(A) + P(B) - P(A and B)
• However, if events A and B are mutually exclusive that is, they cannot occur
simultaneously, then there is no overlap.
Example: A playing card picked from a pack cannot be both a
king and an ace.

King Ace

• In this case, P(A and B) = 0, so the rule can be simplified

P(A or B) = P(A) + P(B)
For mutually exclusive events A and B
Multiplication Rule
• When two events do not affect one another, they are said to be independent.
Example: A customer’s response to a market survey question on soap preference is
independent of whether the marketer’s computer is working when he processes the
survey results.

• If two events are independent, we can use the multiplication rule:

P(A and B) = P(A) × P(B)

Example 4:
The probability that a customer prefers Gentlux soap is 0.3.
The probability that the customer has brown eyes is 0.4
P (prefers Gentlux AND has brown eyes) = 0.3 × 0.4 = 0.12
Probabilities Rule Examples
Example 5:
•A marketer working for a travel agent is researching the likely accommodation requirements of
tourists to a particular holiday destination. She obtains the following information.

a)What is the probability that one of the tourists, chosen at random, is in the 26-35 age-group?

P(aged 26 – 35) =
Probabilities Rule Examples
Example 5 continued:

What is the probability that one of the tourists, chosen at random is:
b) travelling in a mixed gender group?
P(mixed gender group) =

c)travelling in a mixed gender group and in the 26-35 age-group?

We want tourists who are in the ‘overlap’ of both categories.
P(mixed gender group and aged 26-35) =
Probabilities Rule Examples
Example 5 continued:

P(A or B) = P(A) + P(B) - P(A and B)

Probabilities Rule Examples
Exercise: The table below shows the accommodation requirements of tourists to a particular holiday
destination.

What is the probability that one of the tourists, chosen at random is:
a)in the 36+ age group?

b) in the 36+ age group and travelling as an individual?

c) in the 36+ age group or travelling as an individual (or both)?

Conditional Probabilities
Sometimes we are given some extra information about a chosen item. Then we are working in a
reduced sample space/total. We can often identify conditional probability by ‘given’ or ‘if’.
Key words
Example 5 (continued):
What is the probability that a tourist is travelling on their own if they are known to be in the 36+ age-group?

The choice is now reduced to one of the tourists aged 36+.

Given that
P(individual traveller | aged 36+ ) =
Conditional Probabilities
Example 5 (continued):
•What is the probability that one of the tourists is in the 26-35 age-group if they are known
to be travelling in a mixed gender group?

The choice is now reduced to one of the travellers in a mixed gender group.

P( aged 26-35| mixed gender group) =

Sequential Probabilities
In this module we will only consider events that are independent when the probabilities
in the second event are not influenced by what happened in the first event.
Example 6
In a promotion 30% of customers who send for a free copy of a magazine then buy a
subscription.
From a large sample, two independent customers are chosen at random.
The possible outcomes are
buy, buy (BB) This is the same as buy and buy
buy, not (BN)
not, buy (NB)
not, not (NN)
Sequential Probabilities
Example 6 (continued)
Recall: 30% of customers buy a subscription.
Calculate the probability that:
(a) both customers buy a subscription
(b) neither customer buys a subscription
(c) exactly one customer buys a subscription.
Solution
Outcomes: BB BN NB NN. P(Buy) = 0.3, so P(Not Buy) = 0.7
(a) We want P(BB). This is the same as buy and buy so use multiplication rule.
P(BB) = 0.3 × 0.3 = 0.09
(b) P(NN) = 0.7 × 0.7 = 0.49
(c) ‘Exactly one’ could be BN or NB (so use addition rule)
so, P(exactly one buys) = P(BN) + P(NB) = (0.3×0.7) + (0.7×0.3) = 0.42
Sequential Probabilities
Tree Diagrams
We can use tree diagrams to help us solve problems involving sequential probability. You could use
them in the example about buying a subscription (or you may prefer the approach given above).

First Second
customer customer Summary

buy 0.3 P(BB) = 0.3×0.3 = 0.09

buy 0.3
not 0.7 P(BN) = 0.3×0.7 = 0.21

buy 0.3 P(NB) = 0.7×0.3 = 0.21

not 0.7
not 0.7 P(NN) = 0.7×0.7 = 0.49
Sequential Probabilities
Tree Diagrams
We can use tree diagrams to help us solve problems involving sequential probability. You could use
them in the example about buying a subscription (or you may prefer the approach given above).

First Second
customer customer Summary

buy 0.3 P(BB) = 0.3×0.3 = 0.09

buy 0.3
not 0.7 P(BN) = 0.3×0.7 = 0.21

buy 0.3 P(NB) = 0.7×0.3 = 0.21

not 0.7
not 0.7 P(NN) = 0.7×0.7 = 0.49
Sequential Probabilities
Example 7
A confectionary company launches three new products. From its own market research, the
company believes the probabilities that their current retailers will adopt the new products for
sale are:
Fizzballs (F) 0.8
Choco-lite (C) 0.4
Snapberries (S) 0.7
What is the probability that each of the products is NOT adopted?
Fizzballs not adopted = 1 − 0.8 = 0.2

Choco-lite not adopted =

Snapberries not adopted =

 Sequential Probabilities
Example 7
A confectionary company launches three new products. From its own market research, the company believes the probabilities that their current retailers will adopt the new
products for sale are:
Fizzballs (F) 0.8
Choco-lite (C) 0.4
Snapberries (S) 0.7
So: Fizzballs not adopted = 0.2
Assuming independence, what is the probability that:
Choco-lite not adopted = 0.6
a) All 3 products are adopted. Snapberries not adopted = 0.3
We want P( Fizzballs AND Choco-lite AND Snapberries) P(F, C, S) = P(F) × P(C) × P(S) = 0.8 × 0.4 × 0.7 = 0.224

b) Fizzballs and Snapberries are adopted but not Choco-lite - We want P( Fizzballs AND Not Choco-lite AND Snapberries)
P(F, NC, S) = P(F) × P(NC) × P(S) = 0.8 × 0.6 × 0.7 = 0.336
 Sequential Probabilities
Example 7
A confectionary company launches three new products. From its own market research, the company believes the probabilities that their current retailers will adopt the new products for sale are:
Fizzballs (F) 0.8
Choco-lite (C) 0.4
Snapberries (S) 0.7

Assuming independence, what is the probability that: So: Fizzballs not adopted = 0.2
c) At least 2 products are adopted. The possibilities are:
F and C and NS → P( F, C, NS) = 0.8 × 0.4 × 0.3 = 0.096
Choco-lite not adopted = 0.6
or F and NC and S → P( F, NC, S) = 0.8 × 0.6 × 0.7 = 0.336 Snapberries not adopted = 0.3
or NF and C and S → P( NF, C, S) = 0.2 × 0.4 × 0.7 = 0.056
or F and C and S → P( F, C, S) = 0.8 × 0.4 × 0.7 = 0.224
TOTAL = 0.712
 Sequential Probabilities
Example 7
A confectionary company launches three new products. From its own market research, the company
believes the probabilities that their current retailers will adopt the new products for sale are:
Fizzballs (F) 0.8 So: Fizzballs not adopted = 0.2
Choco-lite (C) 0.4 Choco-lite not adopted = 0.6
Snapberries (S) 0.7 Snapberries not adopted = 0.3
Assuming independence, what is the probability that:

Assuming independence, what is the probability that:

a) No products are adopted.

b) Fizzballs are adopted but not Choco-lite and Snapberries

c) Exactly one of the products is adopted

Probability Rules Summary
• Addition Rule
o P(A or B) = P(A) + P(B) (mutually exclusive)
o P(A or B) = P(A) + P(B) – P(A and B)
(not mutually exclusive)
• Multiplication Rule
o P(A and B) = P(A)  P(B) (independent events)

• ‘Not A’ Rule
o P( Not A)= 1 – P(A)
Student Tasks
• You can now start work on the Probability Worksheet available on the
Solent Web Learning module website, under ‘Units – Week 2
(Probability)’
Question?