Chapter 5.

Probability Nguyen Thi Thu Van - October 10, 2022

A random experiment is an observational process whose results cannot be known in advance. For example, when a customer enters a Lexus dealership, will the
customer buy a car or not? How much will the customer spend? The set of all possible outcomes (denoted 𝑆) is the sample space for the experiment. An event is any
subset of outcomes in the sample space. A simple event, or elementary event, is a single outcome. A compound event consisting of two or more simple events.
The probability of an event is a number that measures the relative likelihood that the event will
occur. The probability of an event 𝐴, denoted 𝑃(𝐴), must lie within the interval from 0 to 1: 0 ≤

Descriptive statistics allow us to describe a business process that we’ve already observed. But to 𝑃(𝐴) ≤ 1
compound events: P>1
know how will this process behave in the future, we need probability. Probability helps us  A discrete sample space S consists of all the simple events, denoted 𝐸1 , 𝐸2 , … , 𝐸𝑛 : 𝑆 =

understand and quantify the uncertainty about the future, establishes a connection between samples {𝐸𝟏 , … , 𝐸𝑛 }: 𝑃(𝑆) = 𝑃(𝐸1 ) + 𝑃(𝐸2 ) + ⋯ + 𝑃(𝐸𝑛 ) = 1, 0 ≤ 𝑃(𝐸𝑖 ) ≤ 1

and populations. Inferential statistics rely on this connection when they use sample data as the basis  If the outcome of the experiment is a continuous measurement, the sample space cannot be listed, but it can be described by a rule. For example, the sample space

for making conclusions about populations. for the length of a randomly chosen cell phone call would be 𝑆 = {𝑋|𝑋 ≥ 0}: 𝑃(𝑆) = ∑𝑋∈𝑆 𝑃(𝑋) ≡ ∫ 𝑃(𝑋) = 1, 0 ≤ 𝑃(𝑋) ≤ 1.

Three distinct approaches of assigning probability:

𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑐𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑒𝑠 𝑜𝑓 𝑡ℎ𝑒 𝑒𝑣𝑒𝑛𝑡
 An empirical approach: probability obtained is based on relative frequencies through observations or experiments (𝑎𝑛 𝑒𝑣𝑒𝑛) = . For example, there is a 2 percent chance of twins in a randomly chosen birth.
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠

Law of Large Numbers is an important probability theorem, which says that as the number of trials increases, any empirical probability approaches its theoretical limit.
 A classical/a priori approach: probability obtained is based on logic or theory, not on experience. But such calculations are rarely possible in business situations. For example, there is a 50 percent chance of heads on a coin flip.
 A subjective approach: probability obtained is based on personal judgment or expert opinion. However, such a judgment is not random, because it is based on experience with similar events and knowledge of underlying causal process. Thus, subjective probabilities
have something in common with empirical probabilities. For example, there is an 80 percent chance that Vietnam will bid for the 2024 Winter Olympics.
Key terms Descriptions Formulas
Rules of Complement of an even 𝐴 is denoted by 𝐴′ is every outcome except the event. 𝑃(𝐴) = 1 − 𝑃(𝐴′ )
probability Union of two events 𝐴 and 𝐵 : 𝐴 ⊎ 𝐵 𝑖𝑠 all outcomes in either or both. General law of addition: 𝑃(𝐴 ⊎ 𝐵) = 𝑃(𝐴) + 𝑃(𝐵) − 𝑃(𝐴 ∩ 𝐵)
Intersection of two events 𝐴 and 𝐵: 𝐴 ∩ 𝐵 is only those events in both. The probability of intersection of 2 events is called the joint probability. General law of multiplication: 𝑃(𝐴 ∩ 𝐵) = 𝑃(𝐴|𝐵) × 𝑃(𝐵)
A and B are mutually exclusive (or disjoint) if their intersection is the empty set, i.e., one event precludes the other from occurring. 𝑃(𝐴 ∩ 𝐵) = 0 and 𝑃(𝐴 ⊎ 𝐵) = 𝑃(𝐴) + 𝑃(𝐵)
Events are collectively exhaustive if their union is the entire sample space S (i.e., all the events that can possibly occur). Two mutually exclusive, collectively exhaustive events are binary (or dichotomous) events. For example, a car repair is either covered
by the warranty or not covered by the warranty. Remember that there can be more than 2 mutually exclusive, collectively exhaustive events. For example, a Walmart customer can pay by credit card, debit card, check, or cash.
Odds is the ratio of an event’s probability to the probability of its complement. Odds for event A:
𝑃(𝐴)
Odds against event A:
1−𝑃(𝐴)
1−𝑃(𝐴) 𝑃(𝐴)
𝑎
If odds against event A is quoted as 𝑏 to 𝑎 then 𝑃(𝐴) =
𝑎+𝑏

Conditional The probability of event A given that event B has occurred is a conditional probability, denoted 𝑃(𝐴 | 𝐵) which is read “the probability of A 𝑃(𝐴|𝐵) =
𝑃(𝐴∩𝐵)
𝑃(𝐵)
probability given B.”
Event A is independent of event B if and only if 𝑃(𝐴) = 𝑃(𝐴|𝐵)
Two events are independent when knowing that one event has occurred does not affect the probability that the other event will occur. In If 𝐴, 𝐵 are two independent events then 𝑃(𝐴 ∩ 𝐵) = 𝑃(𝐴) × 𝑃(𝐵)
contrast, they will be called dependent. In general, if 𝐴1, … , 𝐴𝑛 are independent then 𝑃(𝐴1 ∩ … ∩ 𝐴𝑛 ) = 𝑃(𝐴1) × … × 𝑃(𝐴𝑛 ). This law can be
applied to system reliability. For example, suppose that a website has two independent file servers. If each
has 99 percent reliability, what is the total reliability? The principle of redundancy: when individual
components have a low reliability, high reliability can be still achieved with massive redundancy.
Contingency A contingency table is a cross-tabulation of frequencies into 𝑟 rows and 𝑐 columns and is called an 𝑟 × 𝑐 table. The intersection of each row and
table column is a cell that shows a frequency. A contingency table is like a frequency distribution for a single variable, except it has two variables
(rows and columns). Contingency tables often are used to report the results of a survey. Marginal probability of an even is a relative frequency
that is found by dividing a row or column total by the total sample size. Each cell of the 𝑟 × 𝑐 table is used to calculate a joint probability
representing the intersection of two events. Conditional probabilities may be found by restricting ourselves to a single row or column.

Tree Events and probabilities can be displayed in the form of a tree diagram or decision tree to help visualize all possible outcomes without using complicated formulas. A probability tree has two main parts: branches and ends (or also called leaves). The junction
diagrams points between branches and leaves are called nodes. The probability of each branch is generally written on branches, while the outcomes are written on the ends. The tree diagram is a common business planning activity.
Bayes’ Bayes’ theorem [Thomas Bayes (1702–1761)] provides a method of revising probabilities to reflect new information. The prior (unconditional) 𝑃(𝐴|𝐵)𝑃(𝐵) 𝑃(𝐴|𝐵)𝑃(𝐵)
𝑃(𝐵|𝐴) = =
theorem probability of an event B is revised after event A has occurred to yield a posterior (conditional) probability. This theorem is a simple 𝑃(𝐴 ∩ 𝐵) + 𝑃(𝐴 ∩ 𝐵′) 𝑃(𝐴|𝐵)𝑃(𝐵) + 𝑃(𝐴|𝐵′)𝑃(𝐵′)

mathematical formula used for calculating conditional probabilities. where 𝐵, 𝐵’ are mutually exclusive, collectively exhaustive.

Counting Permutation is number of arrangements of sampled items drawn from a population when order is important. 𝑛!
𝑛 𝑃𝑟 =
rules (𝑛 − 𝑟)!
Combination is number of arrangements of sampled items drawn from a population when order does not matter. 𝑛!
𝑛 𝐶𝑟 =
(𝑛 − 𝑟)! 𝑟!