Local

Finance
versus
Corporate
Office
What do you really want?
• What is the measure of success?
• Bikes sold vs subscriptions
• Who is the real customer?
Why are birthdays in
September the most
common?
Concepts in Probability
What is Probability ?

q Chance of rain today

q Likelihood of The Real Madrid winning
Long Run Frequencies notion of Probability

q The probability 0.5 of getting Heads on a coin toss can be thought of

as the long run frequency of multiple coin tosses
Long Run Frequencies notion of Probability

q The probability 0.5 of getting Heads on a coin toss can be thought of as the
long run frequency of multiple coin tosses
q The probability of getting the number 6 on rolling a fair dice can be
considered as a . long run frequency of multiple dice rolls
Probability, a formal definition…

• Probability is a numerical measure of the frequency of occurrence of an

event.
• It is measured on a scale from 0 to 1.
• An event of probability 0 will definitely not occur.
• An event with probability 1 will occur with certainty
Random Experiment and a Random Variable

Random Experiment
It is simply any situation wherein a process leads to
more than one possible outcome
Random Experiment and a Random Variable

Random Experiment
It is simply any situation wherein a process leads to
more than one possible outcome

q A company declaring its Earnings

q Closing value of the stock market tomorrow
q Bonus that you get at year end
q Calling the ex!
Can you think of other experiments in
your company?
A random experiement is anything you
can measure and that can take different
values a.k.a. Random Variables!
Practice Example
Suppose an e-commerce company is running
an email marketing campaign to promote a
new product, and they want to analyze the
conversion rate for this campaign.

• What is the random experiment?

• What is the random variable?
• How is “success” measured?
• What do you estimate the probability of
each outcome is?
Types of Random Variables
 Discrete
Random Variable
Random variables that can assume a countable
number (finite or infinite) of values are called
discrete.
 Discrete Random Variable Examples

Experiment Random Possible

Variable Values
Make 100 Sales Calls # Sales 0, 1, 2, ..., 100

Inspect 70 Radios # Defective 0, 1, 2, ..., 70

Answer 33 Questions # Correct 0, 1, 2, ..., 33

Count Cars at Toll # Cars 0, 1, 2, ..., ∞

Between 11:00 & 1:00 Arriving
 Continuous
Random Variable
Random variables that can assume values
corresponding to any of the points contained in
one or more intervals (i.e., values that are
infinite and uncountable) are called continuous.
 Continuous Random Variable Examples

Experiment Random Possible

Variable Values
Weigh 100 People Weight 45.1, 78, ...
Measure Part Life Hours 900, 875.9, ...
Amount spent on food $ amount 54.12, 42, ...
Measure Time Inter-Arrival 0, 1.3, 2.78, ...
Between Arrivals Time
When you do a random experiment,
you can graph the outcomes
How many apps do you have on your
phone?
Statistical Distributions
How many hours do you spend in
social media?
Statistical Distributions
Discrete versus Continuous
It is common in business applications to use a continuous
distribution such as the Normal (the Bell curve) for discrete data
The net…

An statistical distribution
represents how often each
outcome occurs
How much does a CEO make?
Statistical Distributions
14

12

10

8
Frequency

More
0
75
150
225
300
375
450
525
600
675
750
825
900
975
1050
CEO Salaries (in thousands)
Match the distribution to the marketing strategy
Statistical Distributions
Beta
Binomial
Gamma
Poisson
Normal
t distribution
…
…
Probability Function
Heights of Men and Women

Height
Heights of Men and Women

Height
Heights of Men and Women
Plot of probability Density Function
Higher
probabilities

Height
Heights of Men and Women
Plot of probability Density Function
Higher
probabilities

Lower Lower
probabilities probabilities

Height
Heights of Men and Women
Prob(Height < 5’) = ?

Height
Heights of Men and Women
Prob(Height > 5’ 10”) = ?

Height
Heights of Men and Women
Prob(5’ < Height < 5’ 6”) = ?

Height
Heights of Men and Women
Prob(Height = 5’) = 0

Area of a
line is zero

Height
Heights of Men and Women

Area under the entire curve = 1

Prob(-∞<Height<-∞) = 1

Height
Normal Distribution, a.k.a. the Bell Curve
Normal Distribution, a.k.a. the Bell Curve

two equal halves

Normal Distribution
Normal Distribution
[mean, std dev]

location spread
Normal Distribution

mean
Normal Distribution

-∞ +∞
Mean can move it to right or to the left
Normal Distribution

mean
Normal Distribution

mean
Normal Distribution

mean
Standard Deviation can make it tall or flat
Normal Distribution
Normal Distribution
Normal Distribution

Standard Notation

Random variable typically denoted by X, Y or Z …

or

… more meaningful terms such as Height, Weight, Earnings etc.

Normal Distribution

Standard Notation

Random variable typically denoted by X, Y or Z …

or

… more meaningful terms such as Height, Weight, Earnings etc.

Height ~ Normal(mean, std)

Practice Problem
A bread producing company produces
whole wheat loaves of bread in its
factory.
It observes that on average every day,
85 loaves of bread get discarded on
account of being defective.
The standard deviation of number of
defectives is 9 loaves.
Predict the probability that less
than 70 loaves of bread will get
discarded on being defective
Practice Problem
A bread producing company produces
whole wheat loaves of bread in its
factory.
It observes that on average every day,
85 loaves of bread get discarded on
account of being defective. Defective ~ Normal(85, 9)
The standard deviation of number of Prob(Defective < 70) = ?
defectives is 9 loaves.
Predict the probability that less
than 70 loaves of bread will get
discarded on being defective
Practice Problem
Distribution of # defectives
Defective ~ Normal(85, 9)

Number of Defectives
Practice Problem

Distribution of # defectives
Defective ~ Normal(85, 9)

-∞ …
Number of Defectives
Practice Problem

Syntax:

=NORM.DIST(x, mean, std, TRUE)

=NORM.DIST(70, 85, 9, TRUE)
Practice Problem

=NORM.DIST(95,85,9,TRUE)
What is the probability that the number of
defective loaves produced tomorrow are
in excess of 95?

Number of Defectives
Practice Problem

=NORM.DIST(95,85,9,TRUE)
What is the probability that the number of =1 - NORM.DIST(95,85,9,TRUE)
defective loaves produced tomorrow are
in excess of 95?

Number of Defectives
Practice Problem

=NORM.DIST(95,85,9,TRUE)
What is the probability that the number of =1 - NORM.DIST(95,85,9,TRUE)
defective loaves produced tomorrow are
= 0.13326
in excess of 95?

Number of Defectives
Practice Problem

What is the probability that the number

of defective loaves produced is
between 75 and 80?

Number of Defectives
Practice Problem
Prob(75<Defective<80) = NORM.DIST(80,85,9,TRUE) -
NORM.DIST(75,85,9,TRUE)

What is the probability that the number

of defective loaves produced is
between 75 and 80?

Number of Defectives
Practice Problem

Prob(75<Defective<80) = NORM.DIST(80,85,9,TRUE) - NORM.DIST(75,85,9,TRUE)

What is the probability that the number

of defective loaves produced is
between 75 and 80?

Number of Defectives
Practice Problem

Prob(75<Defective<80) = NORM.DIST(80,85,9,TRUE) - NORM.DIST(75,85,9,TRUE)

=0.1599
What is the probability that the number
of defective loaves produced is
between 75 and 80?

Number of Defectives
https://statistics.cengage.com/SnapStat/index.html#/toolset/distributions
Learning Check
A survey of 1000 U.S. gas stations found that the price charged for
a gallon of regular gas can be closely approximated by a normal
distribution with a mean of $1.90 and a standard deviation of
$0.20. How many of the stations charge

a. between $1.50 and $2.30 for a gallon of regular gas?

b. less than $2.10 for a gallon of regular gas?
c. more than $2.30 for a gallon of regular gas?
LEARNING CHECK
Q: You are researching taxi route time, and have found that the average
amount of time for a driver to go from Cambridge to South End is 20±5
minutes.
Approximately what percentage of people arrive to their destination in 30
minutes or less?

A: 95% of the people arrive

between 10 and 30 min,
and 2.5% of the people
arrive in less than 10 min,
so the total percentage
of people who arrive in
30 min or less is 97.5%
If a customer places an item in the shopping cart,

How confident are you that they will make the

purchase?