Quantitative Methods

Probability Distributions
Dr Abdul Rehman Shahid
Today’s Learning Outcomes

By the end of this session you will be able to:

1. To examine discrete and continuous probability distributions.

2. To appreciate the characteristics of a binomial and poisson distribution
and when they are used.
3. To calculate probabilities and their associated values from a continuous
distribution and its associated standardised normal distribution.

flickr:pictcorrect/6366927999
Probability Quick Recap

An outcome is the result of a  The probability of an event is

chance situation the sum of the probabilities
•a list all possible outcomes covers of the outcomes included in
every possibility (it is exhaustive) that event
•No outcome overlaps any other
(outcomes are mutually exclusive)
 Dice example
An event is a group of such P(Even) = P(2) + P(4)+P(6)
outcomes
e.g. even no. on dice

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 Events
Mutually Exclusive Events
When two (or more) events cannot occur at the same time they are
mutually exclusive
E.g. a person cannot be over 60 and under 16 at the same time. Hence
P(A AND B) = 0
It follows that P(A OR B) = P(A) + P(B)
P(person is over 60) = 0.2

P(person is under 18) = 0.3

P(person is over 60 year old OR they are too young to vote) = 0.2 + 0.3
= 0.5
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Dependent and independent events
When P(A) ≠ P(A | B) the events A and B are
dependent
When P(A) = P(A | B) events A and B are independent
Examples: pick a student at random
A: Good at maths B: Good at chess
A: Good at maths B: Good at table tennis

Example: pick a listed company

A: Company announces good end year results
B: Share price rises the next day.
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Joint Probability

Both event A and event B occur

Called the Joint probability of A and B
Represented by overlap or intersection

e.g.
A: candidate scored more than 60% in an exam
B: candidate is male
A AND B: candidate is male who scored more than 60%
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Conditional Probability

The probability of event A given that event B is known

to have occurred is written P(A | B)
Knowledge of B restricts the range of possible outcomes
When additional information influences the probability of an
event e.g. throw a dice
Event A: a six
Event B: an even number
P(A) = P(six) = 1/6.
Now suppose we are told the throw is even i.e. 2, 4 or 6
The probability of a six given that the throw is even is 1/3
We write P(A | B) = P(six | Even) =1/3
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Venn Diagrams

Student is Male

Student is Finance

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 Venn Diagrams Example

57 men were asked about their favorite

subject
26 like Quantitative Methods (QM)
24 like Interpreting Management (IM)
30 like International Business (IB)
9 like both QM and IM a) Find the probability that a
13 like both QM and IB student selected at random likes
13 like both IM and IB only QM.
4 like all three of them b) Find the probability that a
8 like none of them student selected at random likes
QM, given that he likes IM.
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Venn Diagram to showcase this relationship

Probability a
student likes only
Quantitative
Methods –

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Find the probability that a student selected
at random likes Quantitative Methods, given
that he likes Interpreting Management
= 9/24 = 3/8

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Using decision trees

Decision trees are useful in solving probability problems -

being visual in nature they can depict complex scenarios

The decision tree contains branches and columns.

Probability values should be multiplied along the branches

and added down the columns

It is useful for depicting both dependant and independent

events

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An example…

In order to get a driving license, learners should pass both theory and
driving test

Probability of a learner to pass the theory test is 0.7. If the learner

passes the theory test, then the probability of passing driving test is
0.8.
However if the learner fails the theory test, the probability of passing
second test is 0.6

What is the probability that the student fails both tests?

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Tree Diagram

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Random Variables: Definitions

Random
Variables

Discrete Continuous
Random Variable Random Variable
Random Variables: Definitions

A random variable represents a possible numerical value

from an uncertain event:

• Discrete random variables produce outcomes that come

from a counting process (e.g. number of classes you are
taking).

• Continuous random variables produce outcomes that

come from a measurement (e.g. your annual salary, or
your weight).
 Probability Distribution Function

A probability distribution is a list of all the possible

values a discrete random variable can take and their
associated probabilities
E.g. throwing a dice

Note: often call the random variable X

All possible outcomes and mutually

exclusive so probabilities total 1.
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Probability Distributions

Probability
Distributions

Discrete Continuous
Probability Probability
Distributions Distributions

Binomial Normal

Poisson
The Binomial and Poisson Distributions

Binomial:
• Is a discrete probability distribution and is appropriate when:
• A variable can only take on one of two values.
• The probability of the two outcomes are constant from trial to
trail.
• Successive events are independent.
Poisson:
• It is good at modelling events that occur rarely and at random
(e.g. arrivals at a supermarket checkout).
 Example of binomial distribution

• In a Binomial experiment a fixed number of trials (N) are

undertaken where each trial will have only two
outcomes.
• Binomial distribution represents the probabilities of
different values of binomial random variable (X) when N
number of trials are undertaken
• For a customs officer, the outcome of a passenger check
could be success (a contraband item found) or failure
( no contraband item found)
• Each time the officer searches a customer could be
termed as a trial.
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Scenario: A customs officer 1.SSS There are 8
searches 3 customers and outcomes
2.SSF
would want to know the
chance of getting two 3.SFS Three of the
customers carrying a 4.FSS outcomes
contraband. are
5.SFF
Using S as success – when a favourable
customer is caught, F as 6.FSF
failure – when a customer 7.FFS
is not caught, can result in Probability of
8.FFF success – 3/8
the following scenarios
Probability Distribution

P (Three Success) – 1/8 Simple Binomial Distribution

2/5

P (Two Success – 2/8

P (One Success) – 3/8
2/7

P (Zero Success) – 1/8 1/5

1/9

0
P (Three P(Two P (One P (Zero
success) success) success) Success)

P (X=x) Column1 Column2

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Formula for Binomial Distribution

Calculate the total number of outcomes

Calculate the total number of favourable outcomes
for a given scenario

For our previous example, we needed 2 success out of

three trials
Total number of outcomes = 2^3 = 8

Number of favourable outcomes = = = 3

Probability of success =
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Another Example

What is the probability of getting 5 heads from 10 coin

toss?
Number of outcomes = 2^10 = 1024

Number of favourable outcomes = = = 252

Probability of success = = 24.60%

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Using Excel

Alternatively – you Data Description

can use excel with 5 Number of Heads in
the formula the trial
10 Number of
independent trials
0.5 Probability of
success on each trial

=BINOM.DIST(5,10,0.5,FALSE)
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Scenarios where there is no equal probability

When tossing a coin – there are two outcomes – Head and Tail
Both the outcomes have equal chance of getting ‘Head’ which is 0.5
However in many situations, there may not be equal chance
For e.g.
Joe Blogg says : After boxing day, 70% of the online orders will be returned.
Hence the next 7 out of 10 customers will be returning their orders.
What are the chances that Joe Blogg is correct?
Simplest way to find:

=BINOM.DIST(7,10,0.7,FALSE)
Answer - 0.2668 = 27%
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The Normal Distribution

• ‘Bell Shaped’ and

Symmetrical.
• Mean, Median and f(X)
Mode are equal.
• Location is determined
by the mean, μ. σ
• Spread is determined by
the standard deviation, μ
σ.
• The random variable has Mean
=
an infinite theoretical Median
range. = Mode
Normal Distributions

By varying the parameters μ and σ,

we obtain different normal
distributions.
The Standardised Normal

• Any normal distribution (with any mean and standard

deviation combination) can be converted into the
standardised normal distribution (Z).

• Need to transform X units into Z units.

• The standardised normal distribution (Z) has a mean of 0

and a standard deviation of 1.
Converting to the Standardised
Normal Distribution

• Convert from X to the standardised normal (the “Z”

distribution) by subtracting the mean of X and dividing
by its standard deviation:

• The Z distribution always has mean = 0 and standard

deviation = 1.
The Standardised Normal Distribution

• Also known as the “Z” distribution.

• Mean is 0 and Standard Deviation is 1.

f(Z)

Z
0

Values above the mean have positive Z-values.

Values below the mean have negative Z-values.
The Standardised Normal Distribution
- Example

• If X is distributed normally with mean of £100 and

standard deviation of £50, the Z value for X = £200 is:

• This says that X = £200 is two standard deviations (2

increments of £50 units) above the mean of £100.
Finding Normal Probabilities

• Probability is measured by the area under the curve.

f(X)
P (a ≤ X ≤ b )
= P (a < X < b )
(Note that the probability of
any individual value is zero)

X
a b
Probability as an Area Under the Curve

• The total area under the curve is 1.0, and the curve is
symmetric, so half is above the mean, half is below.
f(X)
P(   X  μ)  0.5 P(μ  X   )  0.5

0.5 0.5

X
μ
P(   X   )  1.0
The Standardised Normal Table

• The Cumulative Standardised Normal table gives the

probability less than a desired value of Z (i.e., from
negative infinity to Z).

0.9772
Example:
P(Z < 2.00) = 0.9772

0 2.00 Z
The Standardised Normal Table
General Procedure for Finding Normal
Probabilities

To find P(a < X < b) when X is distributed normally:

• Draw the normal curve for the problem in terms of X.
• Translate X-values to Z-values.
• Use the Standardized Normal Table.
Finding Normal Probabilities - Example

• Let X represent the time it takes (in seconds) to

download a video file from the internet.
• Suppose X is normal with a mean of 18.0 seconds and a
standard deviation of 5.0 seconds. Find P(X < 18.6).

X
18.0
18.6
Finding Normal Probabilities - Example

• Let X represent the time it takes (in seconds) to download a video

file from the internet.
• Suppose X is normal with a mean of 18.0 seconds and a standard
deviation of 5.0 seconds. Find P(X < 18.6).
X − μ 18.6 −1 8.0
Z= = =0.12
σ 5.0
μ = 18 μ=0
σ=5 σ=1

18 18.6 X 0 0.12 Z
P(X < 18.6)
Finding Normal Upper Tail Probabilities

• Suppose X is normal with mean 18.0 and standard deviation 5.0.

• Now Find P(X > 18.6)

X
18.0
18.6
Finding Normal Upper Tail Probabilities

Now Find P(X > 18.6):

(X > 18.6) = P(Z > 0.12) = 1.0 - P(Z ≤ 0.12)
= 1.0 - 0.5478 = 0.4522

0.5478
1.000 1.0 - 0.5478 =
0.4522

Z Z
0 0
0.12 0.12
Finding a Normal Probability Between
Two Values

Suppose X is normal with mean 18.0 and standard deviation 5.0.

Find P(18 < X < 18.6):

Calculate Z-values:

X − μ 18 −1 8
Z= = =0
σ 5
18 18.6 X
X − μ 18.6 −1 8 0 0.12 Z
Z= = =0.12
σ 5 P(18 < X < 18.6)
P(18 < X < 18.6)
= P(0 < Z < 0.12)
= P(0 < Z < 0.12)
= P(Z < 0.12) – P(Z ≤ 0)
= 0.5478 - 0.5000 = 0.0478