Scribd
Upload
29 views33 pages

MGMT114n - Lesson 2.1 - Intro To Probability Distributions

This document provides an introduction to probability distributions and related concepts. It defines random variables and differentiates between discrete and continuous random variables. It also introduces key probability functions including the probability mass function for discrete variables and the cumulative distribution function. Examples are provided to illustrate concepts like expected value and variance.

Uploaded by

Joyce Baclayon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
29 views33 pages

MGMT114n - Lesson 2.1 - Intro To Probability Distributions

This document provides an introduction to probability distributions and related concepts. It defines random variables and differentiates between discrete and continuous random variables. It also introduces key probability functions including the probability mass function for discrete variables and the cumulative distribution function. Examples are provided to illustrate concepts like expected value and variance.

Uploaded by

Joyce Baclayon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 33

MGMT 114n –

Introduction to
Management
Science

ELVIRA E. ONGY
ASSOCIATE PROFESSOR II
DEPARTMENT OF BUSINESS AND MANAGEMENT
MODULE 2:
Probability
Theories and
Related
Statistics
MGMT 114n – Introduction to Management Science
ELVIRA E. ONGY
ASSOCIATE PROFESSOR II
DEPARTMENT OF BUSINESS AND MANAGEMENT
Lesson 2.1: Introduction to
Probability Distributions
Introduction to Probability
Distributions
 Random Variable
 Represents a possible numerical value from a random event

Random Variables

Discrete Continuous
Random Variable Random Variable

Chap 4-4
Random Variable

• A random variable x takes on a defined set


of values with different probabilities.
• For example, if you roll a die, the outcome is random
(not fixed) and there are 6 possible outcomes, each of
which occur with probability one-sixth.
• For example, if you poll people about their voting
preferences, the percentage of the sample that
responds “Yes on Proposition 100” is a also a random
variable (the percentage will be slightly different every
time you poll).

• Roughly, probability is how frequently we


expect different outcomes to occur if we
repeat the experiment over and over
(“frequentist” view)
Random variables can be
discrete or continuous

 Discrete random variables have a countable


number of outcomes
 Examples: Dead/alive, pass/fail, dice, counts, etc.
 Continuous random variables have an
infinite continuum of possible values.
 Examples: blood pressure, weight, the speed of a
car, the real numbers from 1 to 6.
Probability functions

 A probability function maps the possible


values of x against their respective
probabilities of occurrence, p(x)
 p(x) is a number from 0 to 1.0.
 The area under a probability function is
always 1.
Discrete example: roll of a die
Probability mass function (pmf)
x p(x)
p(x)
1 p(x=1)=1/6
2 p(x=2)=1/6
3 p(x=3)=1/6 1/
6
4 p(x=4)=1/6 x
1 2 3 4 5 6
5 p(x=5)=1/6
6 p(x=6)=1/6  P(x)  1
all x
1.0
Cumulative distribution function (CDF)

x P(x≤A)
1 P(x≤1)=1/6 P(x)
1.0
2 P(x≤2)=2/6 5/6
2/3
1/2
3 P(x≤3)=3/6 1/3
1/6
4 P(x≤4)=4/6 1 2 3 4 5 6 x

5 P(x≤5)=5/6
6 P(x≤6)=6/6
Practice Problem:

 The number of clients arriving at the bank in any given


hour is a random variable represented by x. The probability
distribution for x is:

x 10 11 12 13 14
P(x) .4 .2 .2 .1 .1

Find the probability that in a given hour:


a. exactly 14 clients arrive p(x=14)= .1
b. At least 12 clients arrive p(x12)= (.2 + .1 +.1) = .4

c. At most 11 clients arrive p(x≤11)= (.4 +.2) = .6


Review Question 1

If you toss a die, what’s the probability that you


roll a 3 or less?

a. 1/6
b. 1/3
c. 1/2
d. 5/6
e. 1.0
Review Question 1

If you toss a die, what’s the probability that you


roll a 3 or less?

a. 1/6
b. 1/3
c. 1/2 [p(x=0)+p(x=1)+p(x=2) + p(x=3)] = 0+1+1+1=3/6 or 1/2
d. 5/6
e. 1.0
Review Question 2

Two dice are rolled and the sum of the face


values is six? What is the probability that at
least one of the dice came up a 3?

a. 1/5
b. 2/3
c. 1/2
d. 5/6
e. 1.0
Review Question 2

Two dice are rolled and the sum of the face


values is six. What is the probability that at least
one of the dice came up a 3?

a. 1/5 How can you get a 6 on two


b. 2/3 dice? 1-5, 5-1, 2-4, 4-2, 3-3
c. 1/2 One of these five has a 3.
d. 5/6
1/5
e. 1.0
REVIEW

 Definition and importance of Probability Distribution


 Types of Random Variable (Discrete and Continuous)
 Probability Functions (Probability mass function and Cumulative
probability distribution)
 Expected Value
Expected Value and Variance

 All probability distributions are characterized by an


expected value (mean) and a variance (standard
deviation squared).
Expected value of a random variable

 Expected value is just the average or mean (µ) of


random variable x.

 It’s sometimes called a “weighted average”


because more frequent values of X are weighted
more highly in the average.

 It’s also how we expect X to behave on-average


over the long run (“frequentist” view again).
Expected value, formally

Discrete case:

E( X )   x p(x )
all x
i i
Symbol Interlude

 E(X) = µ
 these symbols are used interchangeably
Example: expected value

 Recall the following probability distribution of


bank arrivals (at any given hour):

x 10 11 12 13 14
P(x) .4 .2 .2 .1 .1

 x p( x)  10(.4)  11(.2)  12(.2)  13(.1)  14(.1)  11.3


i 1
i
Expected Value

 Expected value is an extremely useful concept for


good decision-making!
Example: the lottery

 The Lottery (also known as a tax on


people who are bad at math…)
 A certain lottery works by picking 6
numbers from 1 to 49. It costs Php20
to play the lottery, and if you win,
you win Php50 million after taxes.

 If you play the lottery once, what


are your expected winnings or
losses?
Lottery

Calculate the probability of winning in 1 try:


1 1 1 “49 choose 6”
   7.2 x 10 -8

 49  49! 13,983,816 Out of 49 numbers,


 
 6  43!6! this is the number
of distinct
combinations of 6.
The probability function (note, sums to 1.0):
xPhp p(x)
-20 .999999928

50 million 7.2 x 10--8


Expected Value
The probability function
xPhp p(x)
-20 .999999928

+ 50 million 7.2 x 10--8

Expected Value
E(X) = P(win)*Php50,000,000 + P(lose)*-Php20.00
= 50.0 x 106 * 7.2 x 10-8+ .999999928 (-20) = .-Php16.15

Negative expected value is never good!


You shouldn’t play if you expect to lose money!
Chap 4-24
Expected Value

If you play the lottery every week for 10


years, what are your expected winnings or
losses?

520 x (-16.15) = -Php8,398.00


Expected value isn’t
everything though…

 Take the hit new show “Deal or No Deal”


 Everyone know the rules?
 Let’s say you are down to two cases left. $1 and
$400,000. The banker offers you $200,000.
 So, Deal or No Deal?
Deal or No Deal…

 This could really be represented as a probability distribution and


a non-random variable:

x$ p(x)
+1 .50

+$400,000 .50

x$ p(x)
+$200,000 1.0
Expected value doesn’t help…

x$ p(x)
+1 .50

+$400,000 .50

  E( X )   x p(x
all x
i i )  1(.50)  400 ,000 (.50)  200 ,000

x$ p(x)
+$200,000 1.0

  E ( X )  200,000
How to decide?

Variance!
• If you take the deal, the variance/standard
deviation is 0.
•If you don’t take the deal, what is average
deviation from the mean?
•What’s your gut guess?
Variance/standard deviation

2=Var(x) =E(x-)2

“The expected (or average) squared distance (or


deviation) from the mean”

 2  Var ( x)  E[( x   ) 2 ]  
all x
( xi   ) 2 p(xi )
Symbol Interlude

 Var(X)= 2
 SD(X) = 
 these symbols are used interchangeably
Variance

 2
 (x
all x
i   ) p(xi )
2

2  
all x
( xi   ) 2 p(xi ) 

 (1  200 ,000 ) 2 (.5)  (400 ,000  200 ,000 ) 2 (.5)  200 ,000 2
  200 ,000 2  200 ,000

Now you examine your personal risk tolerance…


END OF LESSON 2.1

You might also like