PROBABILITY

What is Probability?

A quantitative measure of uncertainty

A measure of the strength of belief in the
occurrence of an uncertain event

A measure of the degree of chance or
likelihood of occurrence of an uncertain
event
 Basic Terminology
• Experiment : An activity or process that leads to one
of several possible outcome
• Event: One or more of the possible outcomes of an
experiment
• Sample space: List of all possible outcomes of an
experiment
• Mutually exclusive events: No two outcomes can
occur at the same time
• Collectively exhaustive: When all possible outcomes
are included
 Requirements of Probability
• The probability of any outcome must lie between 0
and 1
i.e., 0 ≤ P(Oi) ≤ 1
for each i
• Sum of probabilities of all outcomes in a sample
space must be 1
K

i.e., Σ P(Oi) = 1
i=1
 Approaches to Probability

• Classical Approach:
Number of outcomes where the event occurs
Total number of possible outcomes

→ Based on equally likely events

→ a priori probability
→ Examples: toss a coin, throw a die, pick a card
• Relative Frequency approach
→ Long-run relative frequency with which an outcome
occurs
→ More trials, greater accuracy
→ Example: Statistical data on deaths used for
calculating risk premium in life insurance
• Subjective approach
→ Based on personal beliefs, experiences, prejudices,
intuition - personal judgment
→ Different for all observers (subjective)
→ Example: New product introduction
Which probability approach/es would you use in
the following cases?
1. The probability of scoring a goal by the Brazil
team in a match is 0.47.
2. The probability that the current railway minister
will resign is 0.40.
3. The probability of rolling two sixes with two dice
is 0.36
4. The probability that I will pass the Statistics
exam this year is 0.80.
5. The probability that the share price of Reliance
Industries Ltd. will rise in the next week is 0.75.
 RULES OF PROBABILITY
• ADDITION RULE
For mutually exclusive events
P(A or B) = P(A) + P(B)

For events that are not mutually exclusive

P(A or B) = P(A) + P(B) – P(A and B)
MULTIPLICATION RULE

• For independent events

P(A and B) = P(A) X P(B)

• For dependent events

P(A and B) = P(A) X P(B/A)
or
P(A and B) = P(B) X P(A/B)
 A machine produces components for use in cellular
phones. At any given time, the machine can be in one,
and only one, of the three states: ‘operational’, ‘out-of-
control’ or ‘down’. From experience with this machine, a
quality control engineer knows that the probability that
the machine is ‘out-of-control’ at any moment is 0.02,
and the probability that it is ‘down’ is 0.015.
(i) What is the relationship between the two events A and
B: A – machine is ‘out-of-control’ and B- ‘machine is
down’?
(ii) When the machine is either ‘out-of-control’ or ‘down’, a
repair person must be called. What is the probability
that a repair person must be called right now?
(iii) Unless the machine is down, it can be used to produce
a single item. What is the probability that the machine
can be used to produce a single component right now?
(i) Mutually exclusive
(ii) 0.02+0.015=0.035
(iii) 1-0.015=0.985
• A spare parts store sells both new and used parts.
60% of the parts in stock are used. 61% are used or
defective. If 5% of the stores parts are defective,
what percentage are both used and defective?
P(U or D) = P(U) + P(D) – P(U and D)
0.61 = 0.6 + 0.05 – P(U and D)
P(U and D) = 0.04
• Approximately 10% of the people are left-handed. If
two people are selected at random, what is the
probability of the following events?
(i) Both are right-handed
(ii) Both are left-handed
(iii) One is right-handed and the other is left-handed
(iv) At least one is right-handed
(i) P(A and B) = 0.9*0.9 =0.81
(ii) P(A’ and B’) = 0.1*0.1 = 0.01
(iii) P(A and B’) + P(A’ and B) = (0.9*0.1) *2
= 0.18
(i) P(A and B’) + P(A’ and B) + P(A and B) = 0.09 +
0.09 + 0.81 =0.99
 TYPES OF PROBABILITY
• Marginal probability: Simple probability of
occurrence of an event
• Joint probability: Probability of two or more
events occuring together or in succession
• Conditional probability: Probability of one
event given the occurrence of another event
 Statistical Independence
• Marginal probability
P(A)
• Joint Probability
P(A and B) = P(A) X P(B)
• Conditional probability
P(B/A) = P(B)
 Statistical Dependence
• Marginal probability
P(A) = P(A and B) + P(A and C)
• Joint Probability
P(A and B) = P(A) X P(B/A),
or
P(A and B) = P(B) X P(A/B)
• Conditional probability
P(B/A) = P(A and B)
P(A)
• 3 Male and Science(S)
• 2 Female (F) and Commerce
• 1 Male and Commerce
• 4 Female (F) and Science(S)
P (commerce) = P(FC) + P(MC) = 3/10
P (Male) = 4/10 = P(MC) + P(MS) = 4/10
P (Female (F)) = 6/10 = 2/10 + 4/10
P (Science(S)) = 3/10 + 4/10 =7/10
• Given that P(A)=3/14, P(B) = 1/6, P(C) = 1/3,
P(AC) = 1/7 and P(B/C) =5/21.
Find the following probabilities:
1. P(A/C)
2. P(C/A)
3. P(BC)
4. P(C/B)
1. (1/7) = 3/7 = 0.428
(1/3)
2. (1/7) = 2/3
(3/14)
3. (5/21) X (1/3) = 5/63
4. (5/63) = 10/21
(1/6)
• A consulting firm is bidding for two jobs, one with
each of two large MNCs. The company executives
estimate that the probability of obtaining the
consulting job with firm A is 0.45. The executives also
feel that if the company gets the job with firm A,
then there is a 0.90 probability that firm B will also
give the company the consulting job. What are the
company’s chances of getting both the jobs?
P(B/A) = P(A and B)
P(A)
So, P(A and B) = 0.9 X 0.45 = 0.405
 Mr. A has prepared a report which must first be
approved by his group leader, department head and
division chief before it is submitted to the chairman.
Mr. A knows that the three managers act
independently. Further, he knows that his group
leader approves 85% of his reports, his department
head approves 80% of his reports and his division chief
approves 82% of his reports.
(i) What is the probability that the first version of Mr. A’s
report is submitted to the chairman?
(ii) What is the probability that the first version of Mr. A’s
report is approved by his group leader and
department head but not by his division chief?
(i) 0.85 X 0.80 X 0.82 = 0.5576
(ii) 0.85 X 0.80 X 0.18 = 0.1224
• A department store analysed its most recent sales
and determined the relationship between the way
customers paid for the item and the price category
of the item. The table below gives the joint
probabilities that were calculated:
Cash Credit card Debit card
Under Rs. 200 0.05 0.03 0.04
Rs. 200-1000 0.03 0.21 0.18
Above Rs. 0.09 0.23 0.14
1000
(i) What proportion of purchases was paid by debit
card?
(ii) Find the probability that a credit card purchase was
over Rs. 1000.
(iii) Determine the proportion of purchases made by
credit card or debit card?
(i) 0.04 + 0.18 + 0.14 = 0.36
(ii) 0.23/0.47 = 0.489
(iii) 0.47 + 0.36 = 0.83
 BAYES’ THEOREM
• Thomas Bayes
• Posterior or revised probabilities

P(Ai/B) = P(Ai ) P(B/Ai)

P(A1 ) P(B/A1) + P(A2 ) P(B/A2)+ ------ + P(Ak) P(B/Ak)

• Consider a test for an illness. The test has a known
reliability. When the test is administered to an ill
person, the test will indicate so with probability 0.92.
When administered to a person who is not ill, the test
will erroneously give a positive result with probability
0.04.
Suppose the illness is rare and is known to affect only
0.1% of the entire population. If a person is randomly
selected from the entire population and is given the
test and the result is positive, what is the probability
that the person is ill?
E P(E) P(indication/E) P(indication and E)
illness 0.001 0.92 0.00092
No illness 0.999 0.04 0.03996
P(indication)= 0.04088

P(ill/ indication) = 0.00092/0.04088 = 0.0225

• A company’s credit manager knows that the Co. uses three
methods to encourage collection of overdue accounts. From
past collection records, he learns that 70% of the accounts
are called personally, 20% are phoned and 10% are sent a
letter. The probability of collecting an overdue amount from
an account with the 3 methods are 0.75, 0.60 and 0.65
respectively. The manager has just received a payment from
a past due account. What is the probability that this account:
(i) was called on personally?
(ii)received a phone call?
(iii)received a letter?
E P(E) P(C/E) P(C and E) P(E/C)
Personally 0.7 0.75 0.525 0.525/ 0.71
Phone 0.2 0.60 0.12 0.12/0.71
Letter 0.1 0.65 0.065 0.065/0.71
0.71
• An economist believes that during periods of high
economic growth, the Indian rupee appreciates with
probability 0.70; in periods of moderate economic
growth, the rupee appreciates with probability 0.40; and
during periods of low economic growth, the rupee
appreciates with probability 0.20. During any period of
time, the probability of high economic growth is 0.30,
the probability of moderate growth is 0.50, and the
probability of low economic growth is 0.20. Suppose the
rupee has been appreciating during the present period.
What is the probability we are experiencing a period of
moderate economic growth?
E P(E) P(A/E) P(AE)
H 0.3 0.7 0.21
M 0.5 0.4 0.20
L 0.2 0.2 0.04
P (A)= 0.45
A doctor has decided to prescribe two new drugs to
200 heart patients as follows: 50 get drug A, 50 get
drug B and 100 get both. The 200 patients were
chosen so that each had an 80% chance of having a
heart attack if given neither drug. Drug A reduces the
probability of a heart attack by 35%, drug B reduces
the probability of a heart attack by 20%, and the two
drugs when taken together work independently. If a
randomly selected patient in the program has a heart
attack, what is the probability that the patient was
given both the drugs?
E P(E) P(H/E) P(HE)
A 0.25 0.65X0.8=0.52 0.13
B 0.25 0.8X0.8=0.64 0.16
Both 0.5 0.8X0.65X0.8=0.416 0.208
P(H) = 0.498
P(AB/H) = 0.208
0.498
= 0.4177