Quantitative Methods 2010

Probability Theory

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 Overview
• Event, experiment, and sample space
• Addition rule for probabilities
• Multiplication rule for probabilities
• Bayes Theorem

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 Event, Experiment and Sample Space
• Event –
– An outcome from doing something
– Two or more events can be clubbed together and
spoken of as a single event
• Experiment –
– The activity that produces an event
• Sample space –
– The set of all possible outcomes of an experiment

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 Probability
• Let “A” be some event.
• Based on prior knowledge (“classical probability”)
No. of ways A can happen
P[ A] 
Tot no. of all possible events
• Based on observations in the past (“relative frequency of
occurrence”)
No. of times A happened
P[ A] 
Tot no. of all possible events
• Based on subjective estimation
• Note: When only 1 event can take place, above probabilities
are known as “marginal probabilities” or “un-conditional
probabilities”

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 Examples – Classical Probability
• Let P[A] be P[Getting “head” in 1 toss] *
1 No of ways of getting “head”
p[ A] 
2
Tot no of all possible outcomes

• Let P[E] be P[fresher entering wrong LH] **

7 No of “wrong” LH
p[ E ] 
8 Tot no of all LH

** Assuming he
* Assuming coin QM 2010 - Kingston
is told to go only 5
is “fair” on 1st floor LH
 Examples – Past Observations
• Let P[B] be P[milk-pouch is “bad”]
– In batches of 200 pouches received in the past,
average 3 were found to be “bad”
3
p[ B]   0.015  1.5%
200
• Let P[x] be P[ company’s IPO will be over-
subscribed]
– Out of 350 IPO’s so far this year, 210 were over-
subscribed
210
p[ X ]   0.6  60%
350
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 Venn Diagrams
• Entire sample space is represented by a rectangle
• The set of events we are interested in is represented by any
closed curve (circle, ellipse, square, etc).
• If 2 or more events are “mutually exclusive”, their closed
curves are shown not overlapping.
– If not (if they can occur together), their closed curves are shown
overlapping.

From supplier A (sample space)

Parts from supplier A Parts with wrong length
Parts from supplier B Parts with wrong diameter 7
QMspace)
Parts from all suppliers (sample 2010 - Kingston
Parts with wrong length AND wrong diameter
 (Statistical)
Independence
• Two events (and their respective probabilities) are said
to be (statistically) independent, if the probability of
either of them happening does not affect the
probability of the other happening.
• Example
– Two suppliers, A and B, have supplied batch of 1000 parts
each, of which some parts are known to be “bad”
(defective).
– Let P[A] be P[picking bad part from A], and P[B] be
P[picking bad part from B]
– Then above events and the respective probabilities P[A]
and P[B] are independent

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 (Statistical)
Dependence
• Two events (and their respective probabilities)
are said to be (statistically) dependent, if the
probability of either of them happening DOES
affect the probability of the other happening.
• Example
– Consider any 1 supplier, A.
– Let P[A,1] be P[1st part picked is bad, and P[A,2] be
P[2nd part picked is bad].
– Then above events, and their respective probabilities
are dependent.

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 “AND” Probabilities
(“Joint” Probabilities)
• When two events are of interest, we may want to
know the probability that both can happen
together
• Joint probability of 2 events A & B is written
P[AB]
• If A & B are independent
 P[AB] = P[A]*P[B]
• If A & B are dependent “Conditional probability of B,
 P[AB] = P[A]*P[B/A] given (that)A (has occurred)”.

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 Examples For AND Probabilities
• Example 1 –
– Five families A,B, C, D, E are waiting for a flat
allotment from MHADA. Only 1 flat is available,
and family will be chosen by random draw. But 2
of the families are retired Navy families, which 2 is
not known
• What is the probability that flat will be given to family
D, AND to a Navy family?
– P[D is chosen] = 1/5 = 0.2, P[Navy family is chosen] = 2/5 = 0.4
– P[flat to D AND to Navy family] = 0.2*0.4 = 0.08

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Venn Diagram For AND Probabilities Example 1

8%

20 % 40 %

P[D is chosen]
P[Navy is chosen]
P[someone is chosen] (sample space)

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 “OR” Probabilities
• When two events can happen, we may want
to know the probability of either one OR the
other happening
• OR probability of events A & B is written
P[A +B] or sometimes P[A or B]
• If events are mutually exclusive
– P[A or B] = P[A] + P[B]
• If events are not mutually exclusive
– P[A or B] = P[A] + P[B] – P[AB]

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 Venn Diagrams For “OR” Probabilities
Mutually exclusive events Not mutually exclusive events

From supplier A (sample space)

Parts from supplier A
Parts with wrong length
Parts from supplier B
Parts with wrong diameter
Parts from all suppliers (sample space)
Parts with wrong length AND wrong diameter

In straight sum, overlapping area

Required probability is straight sum would be counted twice. So required
of the 2 areas probability is straight sum of the 2
areas, minus the overlapping area.
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 Examples for OR Probabilities
• Example 1 –
– Five families A, B, C, D, E are waiting for a flat
allotment by MHADA. Only 1 flat is available, and
family will be chosen by random draw.
– What is the probability that family B or D is
chosen?
– P[B or D is chosen] = P[B is chosen] + P[D is chosen] = 1/5 +
1/5 = 2/5 = 0.4 = 40%

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Venn Diagram For OR Probabilities Example 1

20 % 20 %

P[D is chosen]
P[B is chosen]
P[someone is chosen] (sample space)

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 Examples for OR Probabilities
• Example 2 –
– Five families A, B, C, D, , E are waiting for a flat
allotment from MHADA. Only 1 flat is available, and
family will be chosen by random draw. But 2 of the
families are retired Navy families, which 2 is not
known
• What is the probability that family D is chosen or a Navy
family is chosen?
– P[D is chosen] = 1/5 = 0.2, P[Navy family is chosen] = 2/5 = 0.4,
P[D is Navy family] = P[D]*P[Navy Family] = 0.2*0.4 = 0.08
– Required probability = P[D] + P[Navy family] – P[D is Navy family]
= 0.2 + 0.4 – 0.08
= 0.52

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Venn Diagram For OR Probabilities Example 2

8%

20 % 40 %

P[D is chosen]
P[Navy is chosen]
P[someone is chosen] (sample space)

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 Bayes Theorem
• Useful in situations where you know the
probability of an event (its “prior probability”) ,
but you need a revised probability (its “posterior
probability”), given that some other event has
occurred.
• Example
– You know the probability of winning a contract. You
would like to know what is the probability of winning,
given that one of your competitors’ bid has been
rejected.
• P[B/A] = P[BA]/P[A] --- Bayes Theorem

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 Bayes Theorem Scenario
• Die 1  P[Sixer] = 40%, die 2  P[Sixer] = 70%
– Pick a die at random, and it comes Sixer
– What is the probability that it is Die 1?
• Prior probability of Die 1 = 0.5, Die 2 also = 0.5
• For better answer we form following table:
Die Choice P[Die Choice] P[Sixer|Die Choice] P[Sixer AND Die Choice]

Die 1 0.5 0.4 0.4*0.5 = 0.2

Die 2 0.5 0.7 0.7*0.5 = 0.35
P[Sixer from 1 OR 2] = 0.55
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 Bayes Theorem Scenario
• So P[Die 1|Sixer] = P[Die1 AND Sixer]/P[Sixer]
= 0.20/0.55
= 0.364
• Similarly, P[Die 2|Sixer] = 0.35/0.55 = 0.636
• Conclusion: 1 toss result has allowed us to get
better estimate of P[Die 1] (and Die 2).
• Application: Managers can make better
decisions with Bayesian Decision theory using
additional information.
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 End Of Session
Probability Theory

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