Probability is:

 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
 Measured by a number between 0 and 1 (or
between 0% and 100%)
• An experiment is a process that is performed to
understand and observe possible outcomes.
• An event is an outcome of an experiment.
• Set of all outcomes of an experiment is called the
sample space.
 Example
• In a manufacturing unit three parts from the
assembly are selected. You observe whether they
are defective or not.
• Let us designate a defective as D,
and a non-defective as G.
• Now sample space S = {GGG, GGD, GDG, DGG, GDD,
DGD, DDG, DDD} ; all possible outcomes.
• An event of getting at least two defectives is
E = { GDD, DGD, DDG, DDD}
• Probability of an event A is defined as the ratio
between two numbers m and n.
P (A) = m
n.
Where m= no. of ways that are favorable to the
occurrence of A and
n= the total no. of outcomes of the experiment.
• Always P (A) ≥ 0 and ≤ 1.
TYPES OF PROBABILITY
• Classical
• Relative
• Subjective
• Classical Probability – Here the probability can be
assessed without actually having to perform any
experiment.
• Example: Drawing an ace out of a pack of cards.
• Relative Probability – Here probability cannot be
assessed without performing the experiment or
using the past data.
• Example: What is the probability that you will get a
score of at least 75% in the course Quantitative
Techniques?
 Types of Probability (Continued)

 Subjective Probability
based on personal beliefs, experiences, prejudices,
intuition - personal judgment
different for all observers (subjective)
examples: elections, new product introduction, snowfall
 Basic Definitions
 Set - a collection of elements or objects of
interest
Empty set (denoted by )
 a set containing no elements
Universal set (denoted by S)
 a set containing all possible elements
Complement (Not). The complement of A is
 a set containing all elements of S not in A

 A
 Complement of a Set

Venn Diagram illustrating the Complement of an event

 Basic Definitions (Continued)

Intersection (And)  A  B
– a set containing all elements in both A
and B
Union (Or)
–
 A
a set containing 
allBelements in A or B
or both
Sets: A Intersecting with B

A
B

A B
 Basic Definitions (Continued)

• Mutually exclusive or disjoint sets

– sets having no elements in common, having no intersection,
whose intersection is the empty set.
– Eg. King and Queen in cards.
• Partition
– a collection of mutually exclusive sets which together include all
possible elements, whose union is the universal set.
Mutually Exclusive or Disjoint
Sets
Sets have nothing in common

Queen
King
Sets: Partition

S
A3
A1

A2 A4

A5
Sets: A Union B

A
B

A B
• Independent Events-
Two events A and B are said to be independent if the
occurrence of A is in no way influenced by the
occurrence of B. Likewise, the occurrence of B is no
way influenced by the occurrence of A.
Eg. When you toss a coin twice, getting a head in the
second trial is not influenced by what happened in
the first trial.
 Experiment
• Process that leads to one of several possible
outcomes *, e.g.:
 Coin toss
• Heads, Tails
 Throw die
• 1, 2, 3, 4, 5, 6
 Pick a card
• AH, KH, QH, ...
 Introduce a new product
• Each trial of an experiment has a single observed outcome.
• The precise outcome of a random experiment is unknown
before a trial.

* Also called a basic outcome, elementary event, or simple event

 Events : Definition
 Sample Space or Event Set
 Set of all possible outcomes (universal set) for a given experiment
 E.g.: Roll a regular six-sided die

• S = {1,2,3,4,5,6}
 Event
 Collection of outcomes having a common characteristic
 E.g.: Even number

• A = {2,4,6}
• Event A occurs if an outcome in the set A occurs
 Probability of an event
 Sum of the probabilities of the outcomes of which it consists
 P(A) = P(2) + P(4) + P(6)
 Pick a Card: Sample Space
Hearts Diamonds Clubs Spades
Union of A
K
A
K
A
K
A
K
Event ‘Ace’
Events ‘Heart’ Q Q Q Q
n ( Ace ) 4 1
and ‘Ace’ J J J J
P ( Ace )   
10 10 10 10
P ( Heart  Ace )  9 9 9 9
n(S ) 52 13

8 8 8 8
n ( Heart  Ace ) 7 7 7 7
 6 6 6 6
n(S ) 5 5 5 5
4 4 4 4
16 4 3 3 3 3

2 2 2 2
52 13

The intersection of the

events ‘Heart’ and ‘Ace’
Event ‘Heart’
comprises the single point
n ( Heart ) 13 1
P ( Heart )    circled twice: the ace of hearts
n(S ) 52 4 n ( Heart  Ace ) 1
P ( Heart  Ace )  
n(S ) 52
 Basic Rules for Probability

 Range of Values for P(A): 0  P( A) 1

 Complements - Probability of not A

P( A )  1 P( A)
 Intersection - Probability of both A and B

P( A  B)  n( A  B)
n( S )
Mutually exclusive events (A and C) :

P( A  C )  0
 Basic Rules for Probability
(Continued)
• Union - Probability of A or B or both (rule of unions)
P( A  B)  n( A  B)  P( A)  P( B)  P( A  B)
n( S )
Mutually exclusive events: If A and B are mutually exclusive, then

P( A  B)  0 so P( A  B)  P( A)  P( B)
Sets: P(A Union B)

A
B

P( A  B)
 Multiplication Rule

• Independent Events
For two independent events A and B, the probability
of simultaneous occurrence of A and B, also known
as probability of intersection equals the product of
probability of A and probability of B.
P(A∩B) = P(A).P(B)
• Example: The probability that you will get a A grade
in QT is 0.7 and that you will get a A grade in
Marketing is 0.6. What is the probability that you
will get a A grade in both these subjects?
 Multiplication Rule

• If events are not independent

Two events A and B which are not independent – the
intersection of the two events equals the product
of the probability of A and the probability of B
given that A has happened.
P(A∩B) = P(A).P(B/A).
• It can also be written as
P(A∩B) = P(B).P(A/B).
• P(A/B) or P(B/A) can also be called Conditional
Probability.
 Conditional Probability
• Conditional Probability - Probability of A given B

P( A  B)
P( A B)  , where P( B)  0
P( B)

Independent events:

P( A B)  P( A)
P( B A)  P( B)
 Conditional Probability
(continued)
Rules of conditional probability:

P( A B)  P( A  B) so P( A  B)  P( A B) P( B)
P( B)
 P( B A) P( A)

If events A and D are statistically independent:

P ( A D )  P ( A)
so P( A  D)  P( A) P( D)
P ( D A)  P ( D )
 Example
• From a pack of cards, 2 cards are drawn without
replacement. What is the probability that both cards drawn
are heart?
Let A = getting a heart in first draw
B= getting a heart in second draw
P(A) = 13/52
P(B/A) = 12/51
Therefore
P(A∩B) = P(A). P(B/A)= (13/52) (12/51)=1/17.
• There is a 30% chance that you will catch the 9.00AM bus. If
you catch the bus you will be on time. If you miss the bus,
there is a 60% chance that you will be late. What is the
probability that you will be late?
• There is a 30% chance that you will catch the
9.00AM bus. If you catch the bus you will be on
time. If you miss the bus, there is a 60% chance
that you will be late. What is the probability that
you will be late?
• Hint let P(A)= Miss the bus
P(B) = Late
• P(A∩B)= P(A).P(B/A)
• A survey was conducted for 200 Family Income Income total
families. below 4 above 4
• What is the probability that a Lakhs/y Lakhs/
randomly selected family is a ear. year
buyer of car? Buyer 38 42 80
• What is the probability that a of car
randomly selected family is both a
buyer of a car and belongs to
income 4 lakhs and above? Non- 82 38 120
Buyer
• A family selected at random is of car
found to be belonging to income
of 4 lakhs and above. What is the Total 120 80 200
probability that this family is buyer
of car?
• Marginal probability – simple event P(A) or P(B)
• Joint Probability – simultaneous occurrence of
events P(A∩B)
• Conditional probability – P(A/B) or P(B/A).
 Contingency Table -
Example
Counts
AT& T IBM Total

Telecommunication 40 10 50 Probability that a project

Computers 20 30 50
is undertaken by IBM
given it is a
Total 60 40 100
telecommunications
Probabilities project:
P ( IBM  T )
AT& T IBM Total P ( IBM T ) 
P (T )
Telecommunication .40 .10 .50
0.10
  0.2
Computers .20 .30 .50 0.50

Total .60 .40 1.00

 Probability Tree (Decision Tree)

• There are three Machines designated as A,B,C are

producing same item. The output of A,B,C are 40%,
35%, 25% respectively. A produces 5% defectives. B
produces 10% defectives. C produces 12%
defectives.
• If an item is selected from the total output, what is
the probability that it is defective?
• If an item is selected what is the probability that it
is good?
• An item is selected and found to be defective. What
is the chance that it is produced from A?
 Independence of Events
Conditions for the statistical independence of events A and B:
P ( A B )  P ( A)
P ( B A)  P ( B )
and
P ( A  B )  P ( A) P ( B )
P ( Ace  Heart ) P ( Heart  Ace )
P ( Ace Heart )  P ( Heart Ace ) 
P ( Heart ) P ( Ace )
1 1
1 1
 52   P ( Ace )  52   P ( Heart )
13 13 4 4
52 52

4 13 1
P( Ace  Heart )  *   P( Ace) P( Heart )
52 52 52
Independence of Events –
Example
Events Television (T) and Billboard (B) are
assumed to be independent.

a )P (T  B )  P (T ) P ( B )
 0.04 * 0.06  0.0024
b)P (T  B )  P (T )  P ( B )  P (T  B )
 0.04  0.06  0.0024  0.0976
 2-7 The Law of Total
Probability and Bayes’
Theorem
The law of total probability:
P( A)  P( A  B)  P( A  B )

In terms of conditional probabilities:

P( A)  P( A  B)  P( A  B )
 P( A B) P( B)  P( A B ) P( B )

More generally (where Bi make up a partition):

P( A)   P( A  B )
i
  P( AB ) P( B )
i i
 The Law of Total Probability-
Example
Event U: Stock market will go up in the next year
Event W: Economy will do well in the next year
P(U W ) .75
P(U W ) .30
P(W ) .80 P(W ) 1.8 .2
P(U )  P(U W )  P(U W )
 P(U W )P(W )  P(U W )P(W )
 (.75)(.80)  (.30)(.20)
.60 .06 .66
 Bayes’ Theorem
• Bayes’ theorem enables you, knowing just a little
more than the probability of A given B, to find the
probability of B given A.
• Based on the definition of conditional probability
and the law of total probability.
P ( A  B)
P ( B A) 
P ( A)
P ( A  B) Applying the law of total
 probability to the denominator
P ( A  B)  P ( A  B )
P ( A B) P ( B)
 Applying the definition of
P ( A B) P ( B)  P ( A B ) P ( B ) conditional probability throughout
 Bayes’ Theorem - Example
• A medical test for a rare disease (affecting 0.1% of the
population) is imperfect:
When 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 (false positive) with
probability 0.04 . .
 Example (continued)
P ( I )  0.001 P( I Z ) 
P( I  Z )
P( Z )
P( I  Z )

P( I  Z )  P( I  Z )
P ( I )  0.999
P( Z I ) P( I )

P( Z I ) P( I )  P( Z I ) P( I )

P ( Z I )  0.92 
(.92)( 0.001)
(.92)( 0.001)  ( 0.04)(.999)
0.00092 0.00092
 
0.00092  0.03996
P ( Z I )  0.04 .0225
.04088
Example (Tree Diagram)
Prior Conditional Joint
Probabilities Probabilities Probabilities

P( Z I )  0.92 P( Z  I )  (0.001)(0.92) .00092

P( Z I )  0.08 P( Z  I )  (0.001)(0.08) .00008

P ( I )  0.001

P ( I )  0.999 P( Z I )  0.04 P( Z  I )  (0.999)(0.04) .03996

P( Z I )  0.96

P ( Z  I )  (0.999)(0.96) .95904
 Bayes’ Theorem Extended
• Given a partition of events B1,B2 ,...,Bn:
P( A  B )
P ( B A) 
1
1

P ( A)
Applying the law of total
P( A  B ) probability to the denominator
 1

 P( A  B ) i
Applying the definition of
P( A B ) P( B ) conditional probability throughout
 1 1

 P( A B ) P( B )
i i
 Bayes’ Theorem Extended -
Example
 An economist believes that during periods of high economic growth, the U.S.
dollar appreciates with probability 0.70; in periods of moderate economic
growth, the dollar appreciates with probability 0.40; and during periods of
low economic growth, the dollar appreciates with probability 0.20.
 During any period of time, the probability of high economic growth is 0.30,
the probability of moderate economic growth is 0.50, and the probability of
low economic growth is 0.50.
 Suppose the dollar has been appreciating during the present period. What is
the probability we are experiencing a period of high economic growth?
Partition: Event A  Appreciation
H - High growth P(H) = 0.30 P ( A H )  0.70
M - Moderate growth P(M) = 0.50 P ( A M )  0.40
L - Low growth P(L) = 0.20 P ( A L)  0.20
Example (continued)
P ( H  A)
P ( H A) 
P ( A)
P ( H  A)

P ( H  A )  P ( M  A)  P ( L  A )
P( A H ) P( H )

P ( A H ) P ( H )  P ( A M ) P ( M )  P ( A L) P ( L)
( 0.70)( 0.30)

( 0.70)( 0.30)  ( 0.40)( 0.50)  ( 0.20)( 0.20)
0.21 0.21
 
0.21 0.20  0.04 0.45
 0.467
Example (Tree Diagram)
Prior Conditional Joint
Probabilities Probabilities Probabilities
P ( A H )  0.70 P ( A  H )  ( 0.30)( 0.70)  0.21

P ( A H )  0.30
P ( H )  0.30 P ( A  H )  ( 0.30)( 0.30)  0.09

P ( A M )  0.40 P ( A  M )  ( 0.50)( 0.40)  0.20

P ( M )  0.50

P ( A M )  0.60 P ( A  M )  ( 0.50)( 0.60)  0.30

P ( A L )  0.20
P ( L )  0.20 P ( A  L )  ( 0.20)( 0.20)  0.04

P ( A L )  0.80 P ( A  L)  ( 0.20)( 0.80)  0.16

 The Joint Probability Table

 A joint probability table is similar to a

contingency table , except that it has
probabilities in place of frequencies.
 The row totals and column totals are called

marginal probabilities.