IIMT 2641 Introduction to Business Analytics

Module 1: Probability & Decision Analysis

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Objectives
1. Understand key probability definitions.

2. Understand and apply probability concepts: intersection,

union, complement, and mutually exclusive using tables,
trees, formulas and Venn diagrams.

3. Understand and solve conditional probability problems using

tables, trees, Venn diagrams and formulas

4. Define independence of events, and use the independence

assumption to solve problems.

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Basic probability concepts
§ Experiment: is a process that produces a single outcome whose result
cannot be predicted with certainty

§ Outcomes of an experiment are the events that might possibly happen

– There are two possible outcomes when flipping a coin: "heads" and "tails"
– There are 52 possible outcomes when picking a card at random from a deck

§ An event is a collection of outcomes

– "The card picked is a spade"
– "The card picked is a seven"
– "The card picked is a jack, queen, or king”

§ Sample Space: is the set of all possible outcomes of an experiment

– Example: Sample space of a single die toss:

S={ } or S = {1,2,3,4,5,6}
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Basic probability concepts
§ Probability is a numerical statement about the likelihood that an event will
occur

§ Notation: P(A) = Probability of event A

§ Two basic rules of probability
§ 0 ≤ # $ ≤ 1.
§ The sum of the simple probabilities for all possible outcomes of an
activity (experiment) must equal 1.

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Basic probability concepts

Number of outcomes belong to $

5 # $ =
Number of possible outcomes
Today’s Objectives
1. Understand key probability definitions.

2. Understand and apply probability concepts: intersection,

union, complement, and mutually exclusive using formulas
and Venn diagrams.

3. Understand and solve conditional probability problems using

tables, trees, Venn diagrams and formulas

4. Define independence of events, and use the independence

assumption to solve problems.

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Venn Diagram Representations of Probability
Sample Space

Event A Event B

Sample Space

Event A Event B

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Venn Diagram Representations of Probability
Sample Space

Rolling a Rolling a
3 2

Rolling a 1, 4, 5, or 6

Sample Space

Rolling a
Rolling
number
an even
greater
number
than 3

Rolling a number 3 or smaller that is not even (i.e., Rolling a 1 or 3)

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“A intersection B”: aka A ∩ B
“A intersection B” (A ∩ B) indicates the set of outcomes that are common
to both A and B
Sample Space

Event A Event B

“A intersection B” or A∩B or “A and B”

A = watching 1 to 7 movies per month

B = watching 4 or more movies per month
A ∩ B = watching 4 – 7 movies per month

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“A union B”: aka A ∪ B
“A union B” (aka, A∪B) indicates the collection of outcomes that are in A or B.

Sample Space

Event A Event B

“A union B” or A ∪ B or “A or B”

A = watching 1 to 7 movies per month

B = watching 4 or more movies per month
A ∪ B = watching 1 or more movies per month

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“A complement”: aka #: or #;
Sample Space

Event A Event B

A’ or “not A” or
“A complement”

P(A’) + P(A) = 1

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Venn Diagram Representations of Probability
Sample Space

Event A Event B

A and B not B and not A

or A ∩ B or A’ ∩ B’

A and not B B and not A

or A ∩ B’ or A’ ∩ B

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In Class Practice: Tea/Coffee
A study by Coffee Academics revealed 40% of undergraduates drink both
coffee and tea. The study also found 70% of undergraduates drink coffee. No
students reported drinking neither coffee nor tea.
P(Coffee ∩ Tea) = 0.4 P(Coffee) = 0.7 P(Coffee’∩Tea’) = 0
1. What is the probability a randomly chosen
undergraduate drinks coffee but not tea?

P(Coffee ∩ Tea’) = 0.3

Coffee Tea
2. What is the probability a randomly chosen
0.3 0.4 0.3
undergraduate drinks tea?
P(Tea) = 0.4 + 0.3 = 0.7
0
3. What is the probability a randomly chosen
undergraduate drinks tea but not coffee?

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P(Coffee’ ∩ Tea) = 0.3
Mutually Exclusive
Mutually Exclusive
– Two events are mutually exclusive if they cannot occur at the same
time
– A and B are mutually exclusive if their intersection is the empty set.
$∩< = ∅

– Example:
q A = rolling a pair of dice and getting at least one 2
q B = rolling a pair of dice and getting a sum of 12

If A and B are Mutually Exclusive , then P(A or B) = P(A) + P(B).

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Collectively Exhaustive
A set of events are said to be collectively exhaustive if at least one of
them must occur.

If A and B are collectively exhaustive, then P(A or B) = 1.

Example:
q A = rolling a dice and getting at least 3
q B = rolling a dice and getting at most 4

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In-class Exercises

Mutually Collectively
Two events: A and B
Exclusive Exhaustive
1. Draw a spade and a club Yes No
2. Draw a face card and a number card Yes Yes
3. Draw an ace and a 3 Yes No
4. Draw a club and a non-club Yes Yes
5. Draw a 5 and a diamond No No
6. Draw a red card and a non-diamond No Yes
Useful Probability Rules

§ Rule 1: The probability of any event is a number between zero and one:
0 ≤ P(A) ≤ 1.

§ Rule 2: Additive rule for probability of union of two events

P( A È B) = P( A) + P(B) - P( A Ç B)

§ Rule 3: (Law of Total Probability): For any two events A and B, we have

P( A) = P( A Ç B) + P( A Ç B' )

We are utilizing the property that B and B’ are mutually exclusive and
collectively exhaustive!

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Today’s Objectives
1. Understand key probability definitions.

2. Understand and apply probability concepts: intersection,

union, complement, and mutually exclusive using formulas
and Venn diagrams.

3. Understand and solve conditional probability problems using

tables, trees, Venn diagrams and formulas

4. Define independence of events, and use the independence

assumption to solve problems.

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Conditional Probability
Conditional Probability: Probability of “A given B” = P(A|B)
§ The probability of A, given that B has already happened.
§ The probability of A, given that we are “in” B.
§ The probability of A, given we know B is true.
Additional (new) information allows us to re-assess the likelihood of the event.
Probability may change.

Prior Probability This is our initial assessment of the likelihood of A

Number of times $ occurs

# $ = Example: A: the card picked is a Queen
Number of trials
Conditional This is our updated assessment of the likelihood of A
Probability after observing that B occurred.

# $< Example: B: the card picked is a face card

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Conditional Probability
Conditional Probability: Probability of A given B = P(A|B)

What is the correct way to say P(A|B)?

Probability of:
• “A given B”
• “A conditional on B”

Our new population (Sample Space) is restricted to “B”

and we are interested in the likelihood that A occurs
within this new population.

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Conditional Probability Formula

Sample Space
?(A ∩ B)

Event A Event B

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Conditional Probability Formula

Percentage of cases both $ and < occur #($ ∩ <)

# $< = =
Percentage of cases < occurs #(<)

Sample Space
?(A ∩ B)

Event A Event B

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Conditional Probability Formula

Percentage of cases both $ and < occur #($ ∩ <)

# $< = =
Percentage of cases < occurs #(<)

Sample Space
?(A ∩ B) B B’

A !(# ∩ %)
Event A Event B

A’ !(#′ ∩ %)

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? A ∩ B + ? A! ∩ B = ?(B)
Conditional Probability Formula

Let A denote "the card picked is the queen of any suit"

and B denote "the card picked is a face card", then

"/$%
# $< = = 1/3
&%/$%

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A Property of Conditional Probability
Because conditional probability is focusing on the sub-space where the event
has occurred, the following property holds:

1 = & ' ( + & '′ (

Sample Space
B B’

A
Event A Event B
A’

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Coffee and Tea, Revisited
A study by Campus Coffee revealed 40% of undergraduates drink both coffee
and tea. The study also found 70% of undergraduates drink coffee. No
students reported drinking neither coffee nor tea.
Coffee Coffee’
Coffee Tea
Tea .40 .30 .70
0.3 0.4 0.3
Tea’ .30 0 .30

0 .70 .30

1. Given a person drinks coffee, what is the probability they drink tea?
# HIJ|LMNNII = 0.4/0.7 = 0.57
2. What percentage of undergraduates drink tea but not coffee?
# HIJ ∩ LMNNII′ = 0.3 or 30%
3. If a friend (an undergraduate) of yours does not drink tea, what is the
probability they do drink coffee?
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# LMNNII|HIJ′ = 0.3/0.3 = 1