Probability Analitics For Business
Probability Analitics For Business
Probability Analitics For Business
Notes:
where a value of zero (0) indicates impossible events and a
value of one (1) indicates definite events..
Terminology and some structure in Probability Concept
• Experiment is a process that leads to one of several possible outcomes. The diversity of
the outcomes of an experiment is due to the uncertainty of the real world.
• When is the repair work needed for our laptop? In 1/2/3rd year.
• Roll of dice will result in a value of 1,2,3,4,5,6
• When will the project be finished? In 1/3/4th months.
• whether the profit will improve, stay the same, or deteriorate; and whether a ball game will
end in a win/loss/tie.
• Sample Space, denoted by S, of an experiment contains all possible outcomes of the
experiment.
• suppose the sample space representing the letter grade in a course is given S = {A, B, C, D, F}.
• The sample space for an experiment need not be unique. For example, in the above
experiment, we can also define the sample space with just P (pass) and F (fail) outcomes; that
is, S = {P, F}.
Example
• A snowboarder competing in the Winter Olympic Games is trying to assess her probability
of earning a medal in her event, the ladies’ halfpipe. Construct the appropriate sample
space.
SOLUTION: The athlete’s attempt to predict her chances of earning a medal is an
experiment because, until the Winter Games occur, the outcome is unknown. We formalize
an experiment by constructing its sample space. The athlete’s competition has four possible
outcomes: gold medal, silver medal, bronze medal, and no medal. We formally write the
sample space as S = {gold, silver, bronze, no medal}.
PROBABILTY CONCEPT
• Sample space (S) = include all possible outcome
• Event = any subset of outcomes of the experiment.
Example:
grades :
S = {A, B, C, D, E, F}
Event = getting an A
Medals:
S= {Gold, Silver, Bronze, No Medal}
Event= getting Gold
TYPE OF EVENTS
• Exhaustive
✔ If all possible outcomes of an experiment belong to the events.
✔ For example, the events “at least a silver medal” S= {Gold, Silver} and “at most
a silver medal” S={silver, bronze, no medal} in a single Olympic event are
exhaustive.
• Mutually exclusive
✔ If they do not share any common outcome of an experiment.
✔ For example, the events earning “at least a silver medal” S= {Gold, Silver} and
“at most a bronze medal” S={bronze, no medal} in a single Olympic event are
mutually exclusive .
PROBABILITY CONCEPT
•
INTERSECTION
A B
COMPLEMENT
A Ac
EXAMPLE
THE FUNDAMENTAL PROPERTIES OF
PROBABILITY
•
Notes: Since empirical and classical probabilities generally do not vary from person to person, they
are often grouped as objective probabilities.
Example of Subjective Probability
Suppose the snowboarder believes that there is a 10% chance that she will earn a gold medal, a
15% chance that she will earn a silver medal, a 20% chance that she will earn a bronze medal, and
a 55% chance that she will fail to earn a medal. She has assigned a subjective probability to
each of the simple events. She made a personal assessment of these probabilities
without referencing any data.
EVENT PROBABILITY Symbols
Suppose the snowboarder wants to calculate the probability of earning a medal. In the previous example, we
defined “earning a medal” as event A (A = {gold, silver, bronze}, so the probability statement takes the form P(A).
We calculate this probability by summing the probabilities of the outcomes in A, or equivalently,
Next-Subjective Probability
A = {gold, silver, bronze}; that is, event A denotes earning a medal;
B = {silver, bronze, no medal}; that is, event B denotes earning at most a
silver medal;
EVENT PROBABILITY Symbols
C = {no medal};
Gold 0.10 P({Gold}) = 0.10
calculate the following probabilities.
a. P(B ∪ C ) Silver 0.15 P({silver}) = 0.15
b. P(A n C ) Bronze 0.20 P({Bronze}) = 0.20
c. P(Bc)
No Medal 0.55 P({No Medal}) = 0.55
Empirical Probability
Notes:
The experiment must be repeated a large number of times for
empirical probabilities to be accurate.
Classical Probability
• A classical probability is based on logical analysis rather than on observation or personal
judgment
• In a more narrow range of well-defined problems, we can sometimes deduce (logical
function) probabilities by reasoning about the problem.
• Classical probabilities are often used in games of chance (Dice Games).
-They are based on the assumption that all outcomes of an experiment are equally likely.
Example:
Suppose our experiment consists of rolling a six-sided dice. Then we can define the appropriate sample
space as S = {1, 2, 3, 4, 5, 6}.
a. What is the probability that we roll a 2?
b. What is the probability that we roll a 2 or 5?
c. What is the probability that we roll an even number?
ODDS RATIO
LO 4.5
• The Total Probability Rule conditional on two events
✔ The total probability rule based on two events, B and Bc,
is
✔ or equivalently,
LO 4.5
b
a c
d
BAYES THEOREM
•
•
DISCRETE PROBABILITY
DISTRIBUTION
RANDOM VARIABLES AND DISCRETE
PROBABILITY DISTRIBUTIONS
• A function that assigns numerical values to the outcomes of an experiment.
• Random variables may be classified as:
✔ Discrete
• The random variable assumes a countable number of distinct values.
✔ Continuous
• The random variable is characterized by uncountable values in an
interval.
DISCRETE PROBABILITY DISTRIBUTION
• consider the experiment of rolling a six-sided dice. The probability
distribution is:
x 1 2 3 4 5 6
P(X = x) 1/6 1/6 1/6 1/6 1/6 1/6
• Goal: Inference
• Can we conclude that 62% of the
population favors death penalty?
• We’ll use probability to describe
the likelihood that our sample is
within a level of accuracy
Our confidence level that our
sample is closer to the population