Statistics for Managers using

Microsoft Excel
6th Global Edition

Chapter 4

Basic Probability

Copyright ©2011 Pearson Education 4-1

 Learning Objectives

In this chapter, you learn:

 Basic probability concepts

 Conditional probability
 To use Bayes’ Theorem to revise probabilities
 Various counting rules

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 Basic Probability Concepts

 Probability – the chance that an uncertain event

will occur (always between 0 and 1)

 Impossible Event – an event that has no

chance of occurring (probability = 0)

 Certain Event – an event that is sure to occur

(probability = 1)

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 Assessing Probability

There are three approaches to assessing the

probability of an uncertain event:
1. a priori -- based on prior knowledge of the process

probability of occurrence
Assuming
all
outcomes 2. empirical probability
are equally
likely
probability of occurrence

3. subjective probability

based on a combination of an individual’s past experience,

personal opinion, and analysis of a particular situation
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 Example of a priori probability

Find the probability of selecting a face card (Jack,

Queen, or King) from a standard deck of 52 cards.

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 Example of empirical probability

Find the probability of selecting a male taking statistics

from the population described in the following table:

Taking Stats Not Taking Total

Stats
Male 84 145 229
Female 76 134 210
Total 160 279 439

Probability of male taking stats

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 Events

Each possible outcome of a variable is an event.

 Simple event
 An event described by a single characteristic
 e.g., A red card from a deck of cards
 Joint event
 An event described by two or more characteristics
 e.g., An ace that is also red from a deck of cards
 Complement of an event A (denoted A’)
 All events that are not part of event A
 e.g., All cards that are not diamonds

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 Sample Space
The Sample Space is the collection of all
possible events
e.g. All 6 faces of a die:

e.g. All 52 cards of a bridge deck:

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 Visualizing Events
 Contingency Tables
Ace Not Ace Total

Black 2 24 26
Red 2 24 26

Total 4 48 52
 Decision Trees Total
Ace 2 Number
Sample Of
C ar d
Space
Bla ck 24 Sample
Full Deck No t a n A c e Space
of 52 Cards Ac e Outcomes
Red C 2
ard
Not an 24
Ace
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 Definition: Simple Probability
 Simple Probability refers to the probability of a
simple event.
 ex. P(Ace)
 ex. P(Red)
Ace Not Ace Total P(Red) = 26 / 52
Black 2 24 26
Red 2 24 26

Total 4 48 52

P(Ace) = 4 / 52
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 Definition: Joint Probability
 Joint Probability refers to the probability of an
occurrence of two or more events (joint event).
 ex. P(Ace and Red)
 ex. P(Black and Not Ace)
Ace Not Ace Total

Black 2 24 26 P(Black and Not Ace)=

Red 2 24 26 24 / 52
Total 4 48 52

P(Ace and Red) = 2 / 52

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 Mutually Exclusive Events
 Mutually exclusive events
 Events that cannot occur simultaneously

Example: Drawing one card from a deck of cards

A = queen of diamonds; B = queen of clubs

 Events A and B are mutually exclusive

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 Collectively Exhaustive Events
 Collectively exhaustive events
 One of the events must occur
 The set of events covers the entire sample space

example:
A = aces; B = black cards;
C = diamonds; D = hearts
 Events A, B, C and D are collectively exhaustive
(but not mutually exclusive – an ace may also be
a heart)
 Events B, C and D are collectively exhaustive and
also mutually exclusive

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 Computing Joint and
Marginal Probabilities

 The probability of a joint event, A and B:

 Computing a marginal (or simple) probability:


Where B1, B2, …, Bk are k mutually exclusive and collectively
exhaustive events

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 Joint Probability Example

P(Red and Ace)

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

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 Marginal Probability Example

P(Ace)

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

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 Marginal & Joint Probabilities In A
Contingency Table

Event
Event B1 B2 Total
A1 P(A1 and B1) P(A1 and B2) P(A1)
A2 P(A2 and B1) P(A2 and B2) P(A2)

Total P(B1) P(B2) 1

Joint Probabilities Marginal (Simple) Probabilities

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 Probability Summary So Far
 Probability is the numerical measure
of the likelihood that an event will 1 Certain

occur
 The probability of any event must be
between 0 and 1, inclusively
0 ≤ P(A) ≤ 1 For any event A 0.5
 The sum of the probabilities of all
mutually exclusive and collectively
exhaustive events is 1

0 Impossible
If A, B, and C are mutually exclusive and
collectively exhaustive
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 General Addition Rule

General Addition Rule:

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

If A and B are mutually exclusive, then

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

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 General Addition Rule Example

P(Red or Ace) = P(Red) +P(Ace) - P(Red and Ace)

= 26/52 + 4/52 - 2/52 = 28/52

Don’t count
the two red
Color aces twice!
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

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 Computing Conditional
Probabilities
 A conditional probability is the probability of one
event, given that another event has occurred:
The conditional
probability of A given
that B has occurred

The conditional
probability of B given
that A has occurred

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

P(A) = marginal or simple probability of A
P(B) = marginal or simple probability of B
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 Conditional Probability Example

 Of the cars on a used car lot, 70% have air

conditioning (AC) and 40% have a CD player
(CD). 20% of the cars have both.

 What is the probability that a car has a CD

player, given that it has AC ?

i.e., we want to find P(CD | AC)

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 Conditional Probability Example
(continued)
 Of the cars on a used car lot, 70% have air conditioning
(AC) and 40% have a CD player (CD).
20% of the cars have both.
CD No CD Total
AC 0.2 0.5 0.7
No AC 0.2 0.1 0.3
Total 0.4 0.6 1.0

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 Conditional Probability Example
(continued)
 Given AC, we only consider the top row (70% of the cars). Of these,
20% have a CD player. 20% of 70% is about 28.57%.

CD No CD Total
AC 0.2 0.5 0.7
No AC 0.2 0.1 0.3
Total 0.4 0.6 1.0

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 Using Decision Trees

Given AC or CD P(AC and CD) = 0.2

Ha s
no AC: 0.7
C)= D oe
P( A s
have not P(AC and CD’) = 0.5
AC CD
s
Ha
All Conditional
Probabilities
Cars
Doe
hav s not
eA
C P(A CD P(AC’ and CD) = 0.2
C’) Ha s
=0
.3
D oe
s
have not P(AC’ and CD’) = 0.1
CD
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 Using Decision Trees
(continued)

Given CD or AC P(CD and AC) = 0.2

Ha s
no CD: 0 .4
D) = D oe
P (C s
have not P(CD and AC’) = 0.2
s CD AC
Ha
All Conditional
Probabilities
Cars
Doe
hav s not
eC AC P(CD’ and AC) = 0.5
D P(C Ha s
D’)
=0
.6
D oe
s
have not P(CD’ and AC’) = 0.1
AC
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 Independence
 Two events are independent if and only
if:

 Events A and B are independent when the probability

of one event is not affected by the fact that the other
event has occurred

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 Multiplication Rules

 Multiplication rule for two events A and B:

Note: If A and B are independent, then

and the multiplication rule simplifies to

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 Marginal Probability

 Marginal probability for event A:

 Where B1, B2, …, Bk are k mutually exclusive and

collectively exhaustive events

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 Bayes’ Theorem

 Bayes’ Theorem is used to revise previously

calculated probabilities based on new
information.

 Developed by Thomas Bayes in the 18th

Century.

 It is an extension of conditional probability.

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 Bayes’ Theorem

 where:
Bi = ith event of k mutually exclusive and collectively
exhaustive events
A = new event that might impact P(Bi)

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 Bayes’ Theorem Example

 A drilling company has estimated a 40%

chance of striking oil for their new well.
 A detailed test has been scheduled for more
information. Historically, 60% of successful
wells have had detailed tests, and 20% of
unsuccessful wells have had detailed tests.
 Given that this well has been scheduled for a
detailed test, what is the probability
that the well will be successful?

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 Bayes’ Theorem Example
(continued)

 Let S = successful well

U = unsuccessful well
 P(S) = 0.4 , P(U) = 0.6 (prior probabilities)
 Define the detailed test event as D
 Conditional probabilities:
P(D|S) = 0.6 P(D|U) = 0.2
 Goal is to find P(S|D)

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 Bayes’ Theorem Example
(continued)

Apply Bayes’ Theorem:

So the revised probability of success, given that this well

has been scheduled for a detailed test, is 0.667
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 Bayes’ Theorem Example
(continued)

 Given the detailed test, the revised probability

of a successful well has risen to 0.667 from
the original estimate of 0.4

Prior Conditional Joint Revised

Event Prob.
Prob. Prob. Prob.
S (successful) 0.4 0.6 (0.4)(0.6) = 0.24 0.24/0.36 = 0.667
U (unsuccessful) 0.6 0.2 (0.6)(0.2) = 0.12 0.12/0.36 = 0.333

Sum = 0.36

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 Chapter Summary
 Discussed basic probability concepts
 Sample spaces and events, contingency tables, simple
probability, and joint probability
 Examined basic probability rules
 General addition rule, addition rule for mutually exclusive events,
rule for collectively exhaustive events
 Defined conditional probability
 Statistical independence, marginal probability, decision trees,
and the multiplication rule
 Discussed Bayes’ theorem

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 Statistics for Managers using
Microsoft Excel
6th Edition

Online Topic

Counting Rules

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 Learning Objective

 In many cases, there are a large number of

possible outcomes.

 In this topic, you learn various counting

rules for such situations.

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 Counting Rules
 Rules for counting the number of possible
outcomes
 Counting Rule 1:
 If any one of k different mutually exclusive and
collectively exhaustive events can occur on each of
n trials, the number of possible outcomes is equal to

kn

 Example
 If you roll a fair die 3 times then there are 63 = 216 possible
outcomes

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 Counting Rules
(continued)

 Counting Rule 2:
 If there are k1 events on the first trial, k2 events on
the second trial, … and kn events on the nth trial, the
number of possible outcomes is
(k1)(k2)…(kn)

 Example:
 You want to go to a park, eat at a restaurant, and see a
movie. There are 3 parks, 4 restaurants, and 6 movie
choices. How many different possible combinations are
there?
 Answer: (3)(4)(6) = 72 different possibilities
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 Counting Rules
(continued)

 Counting Rule 3:
 The number of ways that n items can be arranged in
order is
n! = (n)(n – 1)…(1)

 Example:
 You have five books to put on a bookshelf. How many
different ways can these books be placed on the shelf?

 Answer: 5! = (5)(4)(3)(2)(1) = 120 different possibilities

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 Counting Rules
(continued)
 Counting Rule 4:
 Permutations: The number of ways of arranging X
objects selected from n objects in order is

 Example:
 You have five books and are going to put three on a
bookshelf. How many different ways can the books be
ordered on the bookshelf?

 Answer: different possibilities

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 Counting Rules
(continued)

 Counting Rule 5:
 Combinations: The number of ways of selecting X
objects from n objects, irrespective of order, is

 Example:
 You have five books and are going to select three are to
read. How many different combinations are there, ignoring
the order in which they are selected?

 Answer: different possibilities

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 Topic Summary
 Examined 5 counting rules

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