MIS171 Business Analytics

Week 5a: Probability

Unit Schedule
Unit Information
Week 1 Introduction and Data Visualisation
Week 2 Univariate Analyses Assessment task 1 (10%) –
(Participation in Pre lectorial and Lectorial workbook
Descriptive activities and continuous class attendance from week 2 to
Week 3 Bivariate Analyses
week 12)
Week 4 Data visualisation Assessment task 2 (10%) - (Project related Online quiz)
Week 5 Inference Probability
Week 6 Confidence Intervals
Week 7 Hypothesis Testing Assessment task 3 (20%) - (Assignment on analysis and
reporting)
Simple Linear Regression and
Week 8 Predictive Prediction
Week 9 Multiple Linear Regression

Week 10 Multiple Linear Regression in action Assessment task 4 (10%) - (Project related Online quiz)

Week 11 Exam Revision 1

Revision
Week 12 Exam Revision 2
Week 13 Exam Exam (50%)
 Week 4 – Learning objectives

• Explain the concept of probability;

• Derive probabilities of simple, marginal, and joint events using cross
tabulations;
• Explain conditional probability and how it can be applied in a business
context;
• Compute conditional probabilities from cross tabulation data;
• Describe normal distribution and use it to solve business problem;
• Implement payoff tables to evaluate alternative courses of action;
• Use several criteria to select an alternative course of action.

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 Basic Probability Concepts

• A probability is a numerical value that represents the chance, likelihood, or

possibility, that a particular event will occur (always between 0 and 1);

• An event is a collection of one or more outcomes from a sample space.

• An experiment is the process that results in an outcome.

• The outcome of an experiment is a result that we observe.

• The sample space is the collection of all possible outcomes of an experiment.

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 Basic Probability Concepts
There are 3 approaches to assigning a probability to an event:

• The Classical approach, relies upon mathematical laws. Assumes all simple events
are equally likely. (for example, a dice or card game – the probabilities of all
outcomes are known in advance);

• The Relative Frequency approach, based on observed data (for example, your
favourite car park is available on 4 of the 5 days you park there. The Relative
frequency of obtaining your park is 4/5=0.8 or 80%);

• The Subjective approach, based on individual judgment or opinion about the

probability of occurrence (What are the chances in might rain today?).

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 Events and Sample spaces
Events:

• Simple event (denoted A): an outcome from a sample space with one characteristic;
• e.g. Repeat Festival Attendee

• Complement of an event A (denoted A’): All outcomes that are not part of event A;
• e.g. Not a Repeat Festival Attendee

• Joint event (denoted A∩B): Involves two or more characteristics occurring simultaneously;
• e.g. Repeat Festival Attendee and Spent ≥ $600;

The sample space is the collection of ALL possible events;

• e.g. all people who attended the Festival.

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 Simple and Compound events
Example: Random experiment:

-Roll two dice (black and red) and record the score on red and the score on black.
A compound event: the red rolls a 6 and the black rolls a 3
A simple event: The red rolls a 6

(This means that any one of the 6 simple events

6,1; 6,2; 6,3; 6,4; 6,5; 6,6 has occurred)

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 Probability of an event
The probability (P) of any event must be between 0 and 1, therefore:

0 ≤ P(A) ≤ 1 For any event A

The sum of the probabilities of all events is 1.

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 Joint and marginal probabilities

• The probability of the intersection of two

events is called a joint probability.
• The probability of an event, irrespective of the
outcome of the other joint event, is called a
marginal probability.

Here is a contingency table exhibiting joint and

marginal probabilities

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 Workbook exercise 4.1

• A council is investigating the contribution to the local economy of visitors to an

annual three-day music festival. They have collected data from a random sample of
festival attendees aged 18 years and over regarding:

• total amount spent in the region during the festival (e.g., festival tickets);
• whether the festival attendee is a local, from interstate, or from overseas;
• their age;
• their gender.

• The purpose of their study is to target their advertising in order to attract the
festival goers most likely to spend the greatest amount of money in the local
community
 Workbook exercise 4.1

• Based on this information, what are the chances that a Festival attendee:

• spends $600 or more

Answer the question using the contingency table below:
Count of spend Spend $600 Do not spend $600 Grand total
Repeat attendee? or more (B) or more (B)’
Repeat attendee (A) 18 14 32
Not a Repeat attendee 29 55 84
(A)’
Grand total 47 69 116

Joint event Sample space

 Workbook – Exercise 4.2
A sample of 100 individuals were asked to evaluate their preference for three new
proposed energy drinks in a blind taste test. The sample space consists of two types
of outcomes corresponding to each individual: gender (F = female or M = male) and
brand preference (B1, B2, or B3).
Count of respondent Brand 1 Brand 2 Brand 3 Grand total

Female 9 6 22 37

Male 25 17 21 63

Grand total 34 23 43 100

Calculate joint probabilities (by dividing the number of respondents at that

intersection, by all observations in the sample space.)
 Mutually exclusive and exhaustive events
Mutually Exclusive Events: Events that cannot occur together

• Event A = Female Event B = Male

• Events A and B are mutually exclusive (if A happens, B cannot happen)

Collectively Exhaustive Events: One of the events must occur. The set of events
covers the entire sample space
e.g. Attended the Festival, Did Not Attend the Festival are in the sample space and
one event will take place.

The sum of the probabilities of all mutually exclusive and collectively exhaustive
events is 1. If A and B are mutually exclusive and collectively exhaustive, then:
P(A)  P(B)  1

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Workbook Exercise 4.3
As part of the exercise 4.1 the following counts are obtained
Count of age Spend $600 or Do NOT spend $600 or Grand
Aged 18-20 more (B) more total
(B)’

Yes (A) 25 24 49
No (A)’ 22 45 67

Grand total 47 69 116

Based on this information, what are the chances that a Festival attendee:
• spends $600 or more AND is 18 - 20
 General addition rule

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 Addition rule with joint events
Referring to workbook exercise 4.2, events F and M are mutually exclusive, as are events
B1, B2, and B3 since a respondent can only be Male or Female and prefer only one of the
three brands. We can find, for example, P(B1 or B2) = 0.34 + 0.23 = 0.57.

However, events F and B1 are not mutually exclusive because a respondent can be both
Female and Prefer brand 1. Therefore, we find:
P(F or B1) = P(F) + P(B1) – P(F and B1) = 0.37 + 0.34 – 0.09 = 0.62.
Joint probability table

Brand 1 Brand 2 Brand 3 Grand total

P(F)

Female 0.09 0.06 0.22 0.37

Male 0.25 0.17 0.21 0.63

P(F and B1)
Grand total 0.34 0.23 0.43 1
P(B1)

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 Conditional probability
A conditional probability is the probability of one event, given that another event has
occurred or is known to be true.
P(A and B)
P(A|B) 
The conditional probability of A given that B has occurred P(B)

P(A and B)
The conditional probability of B given that A has occurred P(B | A) 
P(A)

where P(A and B) = joint probability of A and B

P(A) = marginal probability of A
P(B) = marginal probability of B

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 Conditional probability
Based on the information given in workbook exercise 4.1 and the table below;
what are the chances that a Festival attendee:
• spends $600 or more GIVEN THAT they are Female

Count of spend Spend $600 or Do NOT spend $600 or Grand

more (B) more total
Gender = Female
(B)’
P (Spend $600 or more | Female) = P(B | A) =

𝑃(𝐴 𝑎𝑛𝑑 𝐵) /𝑃(𝐴) = (25/116)/(51/116) =

Yes (A) 25 26 51

No (A)’ 22 43 65
25/51 or 0.490 or 49.0%
Grand total 47 69 116

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 Workbook exercise 4.5
Refer to workbook exercise 4.2 and the table below;
Count of respondent Brand 1 Brand 2 Brand 3 Grand total

Female 9 6 22 37

Male 25 17 21 63

Grand total 34 23 43 100

Suppose we know a respondent is male. What is the probability that he prefers Brand 1?
 Independent events
A and B are said to be independent events if the probability of event A occurring does
not depend on the occurrence of event B (and vice versa).

i.e., A is unaffected by B, and vice versa.

In this case:
P(A | B) = P(A)
and P(B | A) = P(B).
i.e., the conditional probabilities of independent events are equal to their
unconditional (marginal) probabilities.

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 Independent events - Example Relative J J’ Total
frequency
Are “getting an HD” and “working while studying”
dependent or independent events?
They are independent if P(H | J) = P(H) or P(J | H) = P(J) H 0.15 0.1 0.25
You are “Given” the student has a job, so restrict to the
column “J”.
H’ 0.25 0.5 0.75
P(H and J ) 0.15
P(H | J )    0.375
P (J ) 0.4
Total 0.4 0.6 1
Are they independent? NO
They are independent if P(H | J) = P(H)
0.375 = 0.25

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 Difference between independent events and mutually exclusive events
“Mutually exclusive” and “independent” are very different.

A and B mutually exclusive:

If A occurs, B cannot (and if B occurs, A cannot)
 P(A | B) = P(B | A) = 0
A and B independent:
 P(A | B) = P(A)
and P(B | A) = P(B)
So unless P(A) = P(B) = 0, A and B can’t be both mutually exclusive and independent.
In fact, mutual exclusion is a rather extreme form of dependence: if A occurs then B
cannot!

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 Workbook – Exercise 4.5

A manager of a mobile phone retail shop is interested in finding out the brand
preferences of customers. A random sample 640 customers was selected to study
consumer behaviour with the following results:

a. Complete the above contingency table.

b. What do the marginal probabilities tell you about the Smart Phone brand preference of
customers?
 Workbook – Exercise 4.5

A random sample 640 customers was selected to study consumer behaviour

with the following results:

c. What is the probability that a randomly selected customer does not prefer
iPhone 7?

d. What is the probability that the randomly selected customer is female and
prefers iPhone 7?

e. What is the probability that the randomly selected customer is male or prefers
Galaxy S8?
 Workbook – Exercise 4.5

f. Given that the customer prefers Google Pixel, what is the probability that the
customer is female?

g. What is the probability that the customer prefers iPhone 7, given that the customer
is male?

h. Use some of your answers in exercises 1 and 2 (and any other relevant calculations)
to explain whether SmartPhone Brand preference is independent of gender.
END