Slide 6-1

Chapter 6
Probability: Understanding Random Situations

2/10/2012

Slide 6-2

Introduction
Changes Im not sure
to Im positive well succeed with probability 0.8

The study of Uncertainty

Cant predict for sure what will happen next

But can quantify the likelihood of what might happen And can predict percentages well over the long run e.g., a 60% chance of rain e.g., success/failure of a new business venture

New terminology (words and concepts)

Keeps as much as possible Certain (not random) Put the randomness in only at the last minute
2/10/2012

Slide 6-3

Terminology
A procedure that produces an outcome
Not perfectly predictable in advance

Random Experiment

There are many random experiments (situations)

We will study them one at a time

Example: Record the income of a random family

Random telephone dialing in a target marketing area, repeat until success (income obtained), round to nearest $thousand

Sample Space
A list of all possible outcomes
Each random experiment has one (i.e., one list)

Example: {0, 1,000, 2,000, 3,000, 4,000, }

2/10/2012

Slide 6-4

Terminology (continued)
Happens or not, each time random experiment is run
Formally: a collection of outcomes from sample space A yes or no situation: if the outcome is in the list, the event happens Each random experiment has many different events of interest

Event

Example: the event Low Income ($15,000 or less)

The list of outcomes is {0, 1, 2, , 14,999, 15,000}

Example: the event Six Figures

The list of outcomes is {100,000, 100,001, 100,002, , 999,999}

Example: the event Ten to Forty Thousand

The list of outcomes is {10,000, 10,001, , 39,900, 40,000}
2/10/2012

Slide 6-5

Terminology (continued)

Probability of an Event
A number between 0 and 1
The likelihood of occurrence of an event

Each random experiment has many probability numbers

One probability number for each event

Example: Probability of event Low Income is 0.17

Occurs about 17% over long run, but unpredictable each time

Example: Probability of event Six Figures is 0.08

Not very likely, but reasonably possible

Example: Probability of 10 to 40 thousand is 0.55

A little more likely to occur than not
2/10/2012

Slide 6-6

Sources of Probabilities
From data What percent of the time the event happened in the past

Relative Frequency

Theoretical Probability
From mathematical theory Make assumptions, draw conclusions

Subjective Probability
Anyones opinion, perhaps even without data or theory Bayesian analysis uses subjective probability with data
2/10/2012

Slide 6-7

Relative Frequency
See how often an event happened
(Relative Frequency of A) = (# of times A happened)/n

From data. Run random experiment n times

e.g., of 12 flights, 9 were on time.

Relative frequency of the event on time is 9/12 = 0.75

Law of Large Numbers

If n is large, then the relative frequency will be close to the probability of an event
Probability is FIXED. Relative frequency is RANDOM

e.g., toss coin 20 times. Probability of heads is 0.5

Relative frequency is 12/20 = 0.6 , or 9/20 = 0.45 , depending
2/10/2012

Slide 6-8

Relative Frequency (continued)

Suppose event has probability 0.25 In n = 5 runs of random experiment

Event happens: no, yes, no, no, yes Relative frequency is 2/5 = 0.4

Graph of relative frequencies for n = 1 to 5

Relative frequency
2/10/2012

0.5

0.0 1 2 3 4 5 Number n of times random experiment was run

Slide 6-9

Relative Frequency (continued)

Relative frequency gets closer to probability

As n gets larger Graph of relative frequencies for n = 1 to 200

Relative frequency approaches the probability
0.5 Relative frequency

Probability = 0.25 0 0 50 100 150 200 Number n of times random experiment was run

2/10/2012

Slide 6-10 Table 6.3.1

Relative Frequency (continued)

About how far from the probability will the relative frequency be?
The random relative frequency will be about one of its standard deviations away from the (fixed) probability Depends upon the probability and n
Farther apart when more uncertainty (probability near 0.5)
Probability 0.50 n = 10 25 50 100 1,000
2/10/2012

Probability 0.25 or 0.75 0.14 0.09 0.06 0.04 0.01

Probability 0.10 or 0.90 0.09 0.06 0.04 0.03 0.01

0.16 0.10 0.07 0.05 0.02

Slide 6-11

Theoretical Probability

From mathematical theory One example: The Equally Likely Rule

If all N possible outcomes in the sample space are equally likely, then the probability of any event A is
Prob(A) = (# of outcomes in A) / N

Note: this probability is not a random number. The probability is based on the entire sample space
e.g., Suppose there are 35 defects in a production lot of 400. Choose item at random. Prob(defective) = 35/400 = 0.0875 e.g., Toss coin. Prob(heads) = 1/2 But: Tomorrow it may snow or not. Prob(snow) { 1/2
because snow and not snow are not equally likely
2/10/2012

Slide 6-12

Subjective Probability
What do you think the chances are that the U.S. economy will have steady expansion in the near future? An economists answer

Anyones opinion

Bayesian analysis
Combines subjective probability with data to get results Non-Bayesian Frequentist analysis computes using only the data
But subjective opinions (prior beliefs) can still play a background role, even when they are not introduced as numbers into a calculation, when they influence the choice of data and the methodology (model) used
2/10/2012

Slide 6-13 Fig 6.3.3

Bayesian and Nonbayesian Analysis

Data

Bayesian Analysis
Bayesian Analysis

Prior Probabilities Model

Results

Frequentist (non-Bayesian) Analysis

Data Prior Beliefs Model
2/10/2012

Frequentist Analysis

Results

Slide 6-14

Combining Events
Happens whenever A does not happen

Complement of the event A Union of events A and B

Happens whenever either A or B or both events happen

Intersection of A and B
Happens whenever both A and B happen

Conditional Probability of A Given B

The updated probability of A, possibly changed to reflect the fact that B happens

2/10/2012

Slide 6-15

Complement of an Event

The event not A happens whenever A does not Venn diagram: A (in circle), not A (shaded)
not A A

Prob(not A) = 1 Prob(A)
If Prob(Succeed) = 0.7, then Prob(Fail) = 10.7 = 0.3
2/10/2012

Slide 6-16

Union of Two Events

Union happens whenever either (or both) happen Venn diagram: Union A or B shaded)
A B

e.g., A = get Intel job offer, B = get GM job offer

Did the union happen? Congratulations! You have a job

e.g., Did I have eggs or cereal for breakfast? Yes

2/10/2012

Slide 6-17

Intersection of Two Events

Intersection happens whenever both events happen Venn diagram: Intersection A and B shaded)
A B

e.g., A = sign contract, B = get financing

Did the intersection happen? Great! Project has been launched!

e.g., Did I have eggs and cereal for breakfast? No

2/10/2012

Slide 6-18

Relationship Between and and or

= +

Prob(A or B) = Prob(A)+Prob(B)Prob(A and B)

Prob(A and B) = Prob(A)+Prob(B)Prob(A or B) Example: Customer purchases at appliance store

Prob(Washer) = 0.20 Prob(Dryer) = 0.25 Prob(Washer and Dryer) = 0.15

Then we must have

Prob(Washer or Dryer) = 0.20+0.250.15 = 0.30
2/10/2012

Slide 6-19

Conditional Probability
Prob (Win given Ahead at halftime)
Higher than Prob (Win) evaluated before the game began

Examples

Prob (Succeed given Good results in test market)

Higher than Prob (Succeed) evaluated before marketing study

Prob (Get job given Poor interview)

Lower than Prob (Get job given Good interview)

Prob (Have AIDS given Test positive)

Higher than Prob (Have AIDS) for the population-at-large

2/10/2012

Slide 6-20

Conditional Probability (continued)

Given the extra information that B happens for sure, how must you change the probability for A to correctly reflect this new knowledge?
Prob (A and B) Prob (A given B) = Prob (B) This is a (conditional) probability about A The event B gives information

Unconditional
The probability of A

Conditional
A new universe, since B must happen
2/10/2012

A and B

Slide 6-21

Conditional Probability (continued)

Key words that may suggest conditional probability

By restricting attention to a particular situation where some condition holds (the given information)
Given Of those If When Within (this group)

2/10/2012

Slide 6-22

Conditional Probability (continued)

Prob(Washer) = 0.20 Prob(Dryer) = 0.25 Prob(Washer and Dryer) = 0.15

Example: appliance store purchases

Conditional probability of buying a Dryer given that they bought a Washer

Prob(Dryer given Washer) = Prob(Washer and Dryer)/Prob(Washer) = 0.15/0.20 = 0.75 75% of those buying a washer also bought a dryer

Conditional probability of Washer given Dryer

= Prob(Washer and Dryer)/Prob(Dryer) = 0.15/0.25 = 0.60 60% of those buying a dryer also bought a washer
2/10/2012

Slide 6-23

Independent Events
Three equivalent ways to check independence
Prob (A given B) = Prob (A) Prob (B given A) = Prob (B) Prob (A and B) = Prob (A) v Prob (B)

Two events are Independent if information about one does not change the likelihood of the other

Two events are Dependent if not independent

e.g., Prob(Washer and Dryer) = 0.15
Prob (Washer) v Prob (Dryer) = 0.20 v 0.25 = 0.05

Washer and Dryer are not independent

They are dependent
2/10/2012

Slide 6-24

Mutually Exclusive Events

Two events are Mutually Exclusive if they cannot both happen, that is, if
Prob(A and B) = 0
No overlap in Venn diagram

Examples
Profit and Loss (for a selected business division) Green and Purple (for a manufactured product) Country Squire and Urban Poor (marketing segments)

Mutually exclusive events are dependent events

2/10/2012

Slide 6-25

Probability Trees
Given probabilities for some events (perhaps union, intersection, or conditional)
Find probabilities for other events

A method for solving probability problems

Record the basic information on the tree

Usually three probability numbers are given
Perhaps two probability numbers if events are independent

The tree helps guide your calculations

Each column of circled probabilities adds up to 1 Circled prob times conditional prob gives next probability For each group of branches Conditional probabilities add up to 1 Circled probabilities at end add up to probability at start
2/10/2012

Slide 6-26

Probability Tree (continued)

Event B Event A P(A) P(A and not B) P(A and B)

Shows probabilities and conditional probabilities

P(not A and B) P(not A) P(not A and not B)

2/10/2012

Slide 6-27

Example: Appliance Purchases

Prob(Washer) = 0.20, Prob(Dryer) = 0.25 Prob(Washer and Dryer) = 0.15
Washer? Dryer? 0.15 0.20

First, record the basic information

2/10/2012

Slide 6-28

Example (continued)
0.250.15 = 0.10

Next, subtract: 10.20 = 0.80,

Washer? Dryer?

0.15 0.20

0.10 0.80

2/10/2012

Slide 6-29

Example (continued)
0.800.10 = 0.70

Now subtract: 0.200.15 = 0.05,

Washer? Dryer?

0.15 0.20 0.05

0.10 0.80 0.70

2/10/2012

Slide 6-30

Example (completed tree)

0.15/0.20 = 0.75, 0.05/0.20 = 0.25 0.10/0.80 = 0.125, 0.70/0.80 = 0.875
Washer? Dryer? 0.15 0.20 0.05

Now divide to find conditional probabilities

0.10 0.80 0.70

2/10/2012

Slide 6-31

Example (finding probabilities)

P(Washer) = 0.20 P(Dryer) = 0.15+0.10 = 0.25 P(Washer and Dryer) = 0.15 P(Washer or Dryer) = 0.15+0.05+0.10 = 0.30 P(Washer and not Dryer) = 0.05 P(Dryer given Washer) = 0.75 P(Dryer given not Washer) = 0.125 P(Washer given Dryer) = 0.15/0.25 = 0.60
(using the conditional probability formula) 0.80 0.70 0.20 0.05 Washer? Dryer? 0.15

Finding probabilities from the completed tree

0.10

2/10/2012

Slide 6-32

Example: Venn Diagram

Venn diagram probabilities correspond to righthand endpoints of probability tree

P(Washer and Dryer) P(not Washer and Dryer)

P(Washer and not Dryer) Washer 0.05 0.15 Dryer 0.10 0.70 P(not Washer and not Dryer)
2/10/2012

Slide 6-33

Example: Joint Probability Table

Note: rows add up, and columns add up
P(Washer and Dryer)
Washer Yes Dryer Yes No 0.15 0.05 0.20 No 0.10 0.70 0.80 0.25 0.75 1

Shows probabilities for each event, their complements, and combinations using and
P(not Washer and Dryer) P(Dryer) P(not Dryer)

P(Washer and not Dryer) P(Washer)

2/10/2012

P(not Washer and not Dryer)