TOPIC ONE

PROBABILITY THEORY

November 22, 2024 Prepared by D. Ringo 1

Introduction…..
Probability can be defined as a measure of the likelihood of a particular
outcome among all possible outcomes.
It may also be defined as a quantitative measure of uncertainty.
There are two types of probability:
 Objective Probability
 Subjective Probability
Objective probability is based on a game of chance where all outcomes
have equal chance of occurring.
Objective probability is further divided into two categories;
Classical Probability
Relative Probability

November 22, 2024 Prepared by D. Ringo 2

 Introduction…..
Classical probability, also known as prior probability, is based on the
assumption of equally likely outcomes.
 Classical probability is often applied to situations where each outcome in
the sample space is considered equally likely to occur.
In classical probability, the probability of an event A, denoted as P(A), is
calculated using the following formula:
P(A) = n (A)
n (S)
n (A) – Number of favorable outcomes for an event A
n (S) – Number of sample space

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Introduction…..
Relative probability is based on observed data or empirical evidence.
Instead of assuming equal likelihood of outcomes, relative probability is
calculated by examining the frequency of past occurrences of an event.

Relative frequency probability is probability based on the experiment

conducted many times. The required probability is then defined as the
ratio of the number of experiments that give rise to the event by the
number of experiments conducted.

The relative probability of an event is then calculated as the ratio of the

number of times the event occurred to the total number of observations.

 It's essentially the observed frequency of an event divided by the total

number of observations.
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Subjective Probability
Subjective probability is the probability determined on the basis of one’s
belief, experience, knowledge and other judgmental criteria.
Subjective probability on the same event may differ form one person to
another.
Subjective probability is particularly relevant in situations where objective
probabilities are difficult to determine, and individuals must rely on their
judgment and experiences.

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Some Important Terms
1. Experiment is defined as a process that results in one or more distinct
outcomes, where the specific outcome that occurs cannot be predicted
with certainty.
2. Event is a collection of one ore more favorable elementary outcomes of
an experiment. It is basically a subset of a sample space.
3. Sample space is the totality of all possible elementary outcomes of an
experiment.
4. Elementary outcome is a distinct observation of an experiment.

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Rules of Probability
1. Rule of Range
• If A is an event, then 0≤P(A)≤1. That is, the probability of event A lies
between 0 and 1. If the probability of event A is 0 it means that event A
cannot occur. If the probability of event A is 1, it means that event A is
certain to occur.

2. Rule of Complement
• If A is an event, then P(A) + P(A) = 1

3. Rule of the Union (Additive Rule)

For Non-Mutual Exclusive Events:
• Non-mutual exclusive events are events that may occur together.
• Let A and B be two events, then P(AꓴB) = P(A) + P(B) – P(AꓵB).
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Rules of Probability
For Mutual Exclusive Events
• Mutual exclusive events are events that cannot occur together.
• Let A and B be two events, then P(AꓴB) = P(A) + P(B)

Worked Examples
Example 1
In marketing research survey, people are interviewed about product usage.
One of the questions is about the brand of toothpaste used. If it is known
that 14% of the population use brand A and 9% uses brand B, what is the
probability that a randomly chosen person will be a user of one of the two
brands? (assume that only one brand is used at a given time).
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 Worked Examples

Example 2
There are six people qualified for the position of Assistant Lecturer at
UDOM. The position is to be filled by randomly selecting one person from
the following list:
Person Sex Experience
1 Male 8
2 Female 7
3 Male 12
4 Female 4
5 Female 8
6 Male 4

Find the probability that the individual selected will be either a female or a
person with more than six years of experience.
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Rules of Probability
4. Rule of Multiplication (Multiplicative Rule)
Before discussing the rule we need to understand some basic terms in
connection to this rule;
Conditional Probability; the conditional probability of event A given that
B has occurred is written as P(A/B) and is defined as:

P(A/B) = P(AꓵB)
P(B)
Likewise,
P(B/A) = P(AꓵB)
P(A)

November 22, 2024 Prepared by D. Ringo 10

 Rule of Multiplication (Multiplicative Rule)

Independent and Dependent Events;

Independent events
 Independent events are those events where the occurrence of one has
nothing to do with the occurrence or non-occurrence of another.
 E.g. when a coin is tossed twice, the event of getting a head in the first
toss will not interfere in any way the event-getting another head in the
second toss. The probability of getting a head in the first toss will be ½,
likewise, probability of getting a head in the second toss will be ½.
 Two events A and B are independent if:
P(AꓵB) = P(A) X P(B) (Multiplicative rule for independent events)
 Independent events also satisfy the following conditions:
P(A/B) = P(A) and P(B/A) = P(B)
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 Rule of Multiplication (Multiplicative Rule)

Dependent events
 Dependent events are those events where the occurrence of one event
affect the occurrence of another.
 E.g. if a card is drawn from a deck without replacement, the event of
getting a club in the first draw will have an impact on the event of getting a
club on the second draw. The probability of getting a club on the first draw
will be 13/52, whereby the probability of getting a club in the second draw
will be 12/51.
 Two events A and B are dependent if:
P(AꓵB) = P(A/B) X P(B) = P(B/A) X P(A)
(Multiplicative rule for dependent events)

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 Worked Examples
Example 3
From a deck of cards, 2 cards are drawn at random one after another
without replacement. What is the probability that in both draws you get a
spade?

Example 4
Suppose a coin is tossed twice. Find the probability that a head and a tail will
shown up.

Example 5
The probability of getting A grade in Mathematics is 0.7, and the probability
of getting A in Finance is 0.6. Find the probability of getting an A in both
mathematics and finance.
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 Worked Examples
Example 6
Suppose that TRA estimates that the probability of an error on personal
income tax return is 0.4. If three returns are randomly selected for audit
purposes, what is the probability that:
a) All returns have an error
b) One return has an error

Example 7
A financial services firm places an advertisement in a newspaper. The firm
estimates that there is a probability of 0.6 that people in the potential area
read the newspaper. The research further shows a probability of 0.85 for
people who read the newspaper, remember seeing the advertisement when
questioned about it afterward. What is the probability that people in the
firm’s potential market see and remember the advertisement?
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 Worked Examples
Example 8
One of the greatest problems in marketing research and other survey fields
is the issue of non-response to surveys. In home interviews, the problem
arises from absence from home at the time of the visit or, sometimes,
refusal to answer questions. A market researcher believes that a respondent
will answer all questions with a probability of 0.94 if found at home.
Furthermore, the researcher believes that the probability of finding a given
person at home is 0.65. Given this information, what is the probability that
the interview will be successful?

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 Worked Examples
Example 9
A firm is supplied with components from three sources: A, B, and C. It is
further known that 50% of the supplies come from A, 30% come from B, and
the rest come from C. From experience, it is found that 10% of the
components supplied by A are defective, 5% supplied by B are defective, and
6% supplied by C are also defective. If a component is picked at random and
is found to be defective, what is the probability that it came from A?

Example 10
The probability that a bank customer will default on a loan is 0.4 if the
economy is high and 0.13 if the economy is not high. Suppose the
probability that the economy will be high is 0.65.
a) What is the probability that the person will default on the loan?
b) Given that the customer has defaulted, what is the probability that the
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Rules of Probability
5. Law of Total Probability and Bayes' Rule
 The Law of Total Probability is a probability rule that expresses the total
probability of an event in terms of the conditional probabilities of the
event given different scenarios.
 The law of total probability states that;
P(A) = P(AꓵB) + P(AꓵB)
 That is, the probability of event A is equal to the joint probability of A and
B plus the joint probability of A and the complement of B.
 Recall, P(AꓵB) = P(A/B) X P(B), then from the law of total probability can
be written as;
P(A) = P(A/B) X P(B) + P(A/B) X P(B)

 Also, P(B/A) = P(AꓵB) / P(A)

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Rules of Probability
Therefore:
P(B/A) = P(AꓵB)
P(A/B) X P(B) + P(A/B) X P(B)

Hence: P(B/A) = P(A/B) X P(B)

P(A/B) X P(B) + P(A/B) X P(B) (Bayes’ Rule)

November 22, 2024 Prepared by D. Ringo 18

 Worked Examples
Example 11
As items come to the end of a production line, an inspector chooses
which items are to go through a complete inspection. Suppose that in
this particular line, 10% of all items produced are defective. Suppose
further that, 60% of all defective items go through a complete
inspection, and 20% of all good items go through a complete
inspection. Given that an item is completely inspected, what is the
probability that it is defective?

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