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Chapter 1 Overview of Basic Probability Theory

1) The document provides an overview of basic probability theory concepts including sample space, sample points, events, axioms of probability, counting procedures like permutations and combinations, conditional probability, independence, and Bayes' theorem. 2) Key concepts are defined such as sample space, probability, permutations, combinations, conditional probability, dependent and independent events, and Bayes' theorem. 3) Examples are provided to illustrate concepts like finding the probability of arrangements given people to choose from, conditional probabilities for dependent and independent events, and applying Bayes' theorem to calculate posterior probabilities.

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jared demissie
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46 views

Chapter 1 Overview of Basic Probability Theory

1) The document provides an overview of basic probability theory concepts including sample space, sample points, events, axioms of probability, counting procedures like permutations and combinations, conditional probability, independence, and Bayes' theorem. 2) Key concepts are defined such as sample space, probability, permutations, combinations, conditional probability, dependent and independent events, and Bayes' theorem. 3) Examples are provided to illustrate concepts like finding the probability of arrangements given people to choose from, conditional probabilities for dependent and independent events, and applying Bayes' theorem to calculate posterior probabilities.

Uploaded by

jared demissie
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Premium College

Statistics for Economics


Chapter 1: Overview of Basic Probability Theory
1.1. Sample/Even Space & Sample Points/Events
• Sample space (S) – is the set of all distinct possible outcomes of a
statistical experiment E.g. S = {HT, TH, HH, TT}

• Sample points – each outcome in a sample space a.k.a. an element


of a member of the sample space

• Definition of probability – a number that represents the chance that


a particular event will occur for a random variable.
 The frequentist definition of probability used in statistics
1.2. Axioms of Probability

1) For any event A, 0 ≤ 𝑃(𝐴) ≤ 1

2) Probability of the sample space S is P(S) = 1

3) If A1, A2, A3, ….An, are disjoint or mutually exclusive (incompatible)


events, their intersection is empty. Hence, the sum of the
probabilities of mutually exclusive outcomes is equal to 1.
1.3. Counting Procedure
• Permutations
• A permutation is an arrangement of objects without repetition where
order is important.
• A permutation of n objects, arranged in groups of size r, without
𝑛!
repetition, and order being important is 𝑛𝑃𝑟 =
𝑛−𝑟 !

Example: Suppose a local NGO elects its officers from a board of


trustees. If there are 30 trustees, how many possible ways could the
board elect a president, vice-president, secretary, and treasurer?
…counting procedure …(Cont’d)
Summary: Permutation

• The number of arrangements of r objects chosen


from n objects in which

1.the n objects are distinct,

2.repeats are not allowed,

3.order matters
…counting procedure …(Cont’d)
• Combinations
• A combination is an arrangement of objects without repetition where order is
not important.

• A combination of n objects, arranged in groups of size r, without repetition,


𝑛 𝑛!
and order being important is = 𝑛𝐶𝑟 =
𝑟 𝑛−𝑟 !𝑟!

• Example:

1) Let's consider again the board of trustees with 30 members. In how many ways
could the board elect four members for the finance committee?

2) In how many ways could the letters in the word STATISTICS be rearranged?
…counting procedure …(Cont’d)
Note:
• The difference between a permutation and a combination is not
whether there is repetition or not -- there must not be repetition
with either, and if there is repetition, you can not use the formulas
for permutations or combinations.

• The only difference in the definition of a permutation and a


combination is whether order is important.
…counting procedure …(Cont’d)
Multiplication Rule of Counting
• If a task consists of a sequence of choices in which
there are p ways to make the first choice, q ways to
make the second, etc., then the task can be done in
pxqx...different ways.

Example: How many 7-character license plates are


possible if the first three characters must be letters, the
last four must be digits 0-9, and repeated characters are
allowed?
1.4. Conditional Probability & Independence
Multiplication Rule – Independent Events

• When 2 events are independent, the probability of both occurring is


P( A and B)  P( A)  P( B)
• “or” means to add
• “and” means to multiply (unless it is in a contingency table, and you
can actually see the intersection)
• Example:
1) If a coin is tossed twice, find the probability of getting 2 heads.
2) A coin is flipped and a die is rolled. Find the probability of getting a
head on the coin and a 4 on the die.
Multiplication Rule – Dependent Events
• When 2 events are dependent, the probability of both occurring is
𝑃(𝐴 𝑎𝑛𝑑 𝐵) = 𝑃(𝐴) ⋅ 𝑃(𝐵│𝐴)

Joint Probability = Marginal Probability x Conditional Probability


• The slash reads: “The probability that B occurs given that A has
already occurred.”
P A B  
P( A and B)
P( B)

Examples:
a) Noah Real Estate Plan, 42% of the houses have a deck and a garage; 60%
have a deck. Find the probability that a home has a garage, given that it
has a deck.
Exercise:
• At an exclusive country club, 83% of the members play bridge; 75% of the
members drink champagne given that he or she plays bridge. Find the
probability that members drink champagne and play bridge.
• Survey on Women in Military: A recent survey asked 100 people if they thought
women in the armed forces should be permitted to participate in combat. The
results are shown in the table
a) Find the probability that they answered yes, given that they were female.
b) Find the probability that they were male, given that they answered no.
1.5. Bayes’ Theorem
• Thomas Bayes, an English Clergyman (1702 – 1761)
• It describes the probability of an event, based on prior
knowledge of conditions that might be related to the event.
• We start with a hypothesis and a degree of belief in that hypothesis.
That means, based on domain expertise or prior knowledge, we
assign a non-zero probability to that hypothesis.
• Then, we gather data and update our initial beliefs. If the data support
the hypothesis, then the probability goes up, otherwise the probability
goes down
…Bayes’ Theorem …(Cont’d)
• The Bayes’ theorem is used in Bayesian inference, usually dealing with a
sequence of events, as new information becomes available about a
subsequent event, that new information is used to update the probability of
the initial event.
• Two flavors of probabilities: prior probability and posterior probability.
• Prior probability - initial belief about a particular hypothesis before any
evidence is available about the hypothesis.
• Posterior probability - is the updated belief about the hypothesis as new
evident becomes available
…Bayes’ Theorem …(Cont’d)

• It is a way of finding a probability when we know certain other


probabilities

• Which tells us: how often A happens given that B happens, P(A│B)
• When we know: how often B happens given that A happens, P(B│A)
and how likely A is on its own, P(A)
and how likely B is on its own, P(B)
Example: Bayes’ rule

 You are planning a picnic today to Wonchi Lake, but the morning is cloudy. About
50% of all rainy days start off cloudy. But cloudy mornings are common (about 40%
of days start cloudy). And this is usually a dry month (only 3 of 30 days tend to be
rainy, or 10%). What is the chance of rain during the day, given cloud?
Given:
• P(Cloud|Rain) is Probability of Cloud, given that Rain happens = 50%
• P(Cloud) is Probability of Cloud = 40%
• P(Rain) is Probability of Rain = 10%

P(Rain│Cloud) = P(Rain) . P(Cloud|Rain) = (0.10) (0.50) = 0.125


P(Cloud) (0.40)

Conclusion: Or a 12.5% chance of rain. Not too bad, you can have a picnic!
Exercise:
1) In Premium College, 60% of the boys play football and 36% of the boys play
volleyball. Given that 40% of those that play football also play volleyball, what
percent of those that play volleyball also play football? (Answer = 0.6667)

2) In Premium College, 40% of the girls like music and 24% of the girls like
dance. Given that 30% of those that like music also like dance, what
percent of those that like dance also like music? (Answer = 50% )
END OF CHAPTER 1

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