complete business statistics

Click To Edit Master Title Style

2-1

COMPLETE COMPLETE BUSINESS BUSINESS

STATISTICSSTATISTICSbyby

AMIR D. ACZELAMIR D. ACZEL

&&

JAYAVEL SOUNDERPANDIANJAYAVEL SOUNDERPANDIAN

66thth edition (SIE) edition (SIE)

Click To Edit Master Title Style

2-2

Chapter 2 Chapter 2

ProbabilityProbability

2-3

Using Statistics Basic Definitions: Events, Sample Space, and Probabilities Basic Rules for Probability Conditional Probability Independence of Events Combinatorial Concepts The Law of Total Probability and Bayes’ Theorem Joint Probability Table Using the Computer

ProbabilityProbability22

2-4

Define probability, sample space, and event. Distinguish between subjective and objective probability. Describe the complement of an event, the intersection, and the union of two

events. Compute probabilities of various types of events. Explain the concept of conditional probability and how to compute it. Describe permutation and combination and their use in certain probability

computations. Explain Bayes’ theorem and its applications.

LEARNING OBJECTIVESLEARNING OBJECTIVES

After studying this chapter, you should be able to:After studying this chapter, you should be able to:

22

2-5

2-1 Probability is:2-1 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%)

2-6

Types of ProbabilityTypes of Probability

Objective or Classical Probability based on equally-likely events based on long-run relative frequency of events not based on personal beliefs is the same for all observers (objective) examples: toss a coin, throw a die, pick a card

2-7

Types of Probability (Continued)Types of Probability (Continued)

Subjective Probability based on personal beliefs, experiences, prejudices, intuition - personal

judgment different for all observers (subjective) examples: Super Bowl, elections, new product introduction, snowfall

2-8

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

2-2 Basic Definitions 2-2 Basic Definitions

2-9

Complement of a SetComplement of a Set

A

A

S

Venn Diagram illustrating the Complement of an eventVenn Diagram illustrating the Complement of an event

2-10

Intersection (And)– a set containing all elements in both A and B

Union (Or)– a set containing all elements in A or B or both

A B A B

A B A B

Basic Definitions (Continued)Basic Definitions (Continued)

2-11

A BA B

Sets: A Intersecting with BSets: A Intersecting with B

AB

S

2-12

Sets: A Union BSets: A Union B

A BA B

AB

S

2-13

• Mutually exclusive or disjoint sets

–sets having no elements in common, having no intersection, whose intersection is the empty set

• Partition

–a collection of mutually exclusive sets which together include all possible elements, whose union is the universal set

Basic Definitions (Continued)Basic Definitions (Continued)

2-14

Mutually Exclusive or Disjoint Sets Mutually Exclusive or Disjoint Sets

A B

S

Sets have nothing in common

2-15

Sets: PartitionSets: Partition

A1

A2

A3

A4

A5

S

2-16

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

ExperimentExperiment

2-17

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)

Events : DefinitionEvents : Definition

2-18

• For example: Throw a die

• Six possible outcomes {1,2,3,4,5,6}• If each is equally-likely, the probability of each is 1/6 = 0.1667 =

16.67%

• Probability of each equally-likely outcome is 1 divided by the number

of possible outcomes Event A (even number)

• P(A) = P(2) + P(4) + P(6) = 1/6 + 1/6 + 1/6 = 1/2• for e in A

P A P e

n A

n S

( ) ( )

( )

( )

3

6

1

2

P en S

( )( )

1

Equally-likely ProbabilitiesEqually-likely Probabilities(Hypothetical or Ideal Experiments)(Hypothetical or Ideal Experiments)

2-19

Pick a Card: Sample SpacePick a Card: Sample Space

Event ‘Ace’Union of Events ‘Heart’and ‘Ace’

Event ‘Heart’

The intersection of theevents ‘Heart’ and ‘Ace’ comprises the single pointcircled twice: the ace of hearts

P Heart Ace

n Heart Ace

n S

( )

( )

( )

16

52

4

13

P Heartn Heart

n S

( )( )

( )

13

52

1

4

P Acen Ace

n S

( )( )

( )

4

52

1

13

P Heart Acen Heart Ace

n S

( )( )

( )

1

52

Hearts Diamonds Clubs Spades

A A A AK K K KQ Q Q QJ J J J

10 10 10 109 9 9 98 8 8 87 7 7 76 6 6 65 5 5 54 4 4 43 3 3 32 2 2 2

2-20

Range of Values for P(A):

Complements - Probability of not A

Intersection - Probability of both A and B

Mutually exclusive events (A and C) :

Range of Values for P(A):

Complements - Probability of not A

Intersection - Probability of both A and B

Mutually exclusive events (A and C) :

1)(0 AP

P A P A( ) ( ) 1

P A B n A Bn S

( ) ( )( )

P A C( ) 0

2-3 Basic Rules for Probability 2-3 Basic Rules for Probability

2-21

• Union - Probability of A or B or both (rule of unions)

Mutually exclusive events: If A and B are mutually exclusive, then

• Union - Probability of A or B or both (rule of unions)

Mutually exclusive events: If A and B are mutually exclusive, then

P A B n A Bn S

P A P B P A B( ) ( )( )

( ) ( ) ( )

)()()( 0)( BPAPBAPsoBAP

Basic Rules for Probability Basic Rules for Probability (Continued)(Continued)

2-22

Sets: P(A Union B)Sets: P(A Union B)

)( BAP )( BAP

AB

S

2-23

• Conditional Probability - Probability of A given B

Independent events:

• Conditional Probability - Probability of A given B

Independent events:

0)( ,)(

)()( BPwhereBP

BAPBAP

P A B P A

P B A P B

( ) ( )

( ) ( )

2-4 Conditional Probability2-4 Conditional Probability

2-24

Rules of conditional probability:Rules of conditional probability:

If events A and D are statistically independent:

so

so

P A B P A BP B

( ) ( )( )

P A B P A B P B

P B A P A

( ) ( ) ( )

( ) ( )

P AD P A

P D A P D

( ) ( )

( ) ( )

P A D P A P D( ) ( ) ( )

Conditional Probability (continued)Conditional Probability (continued)

2-25

AT& T IBM Total

Telecommunication 40 10 50

Computers 20 30 50

Total 60 40 100

Counts

AT& T IBM Total

Telecommunication .40 .10 .50

Computers .20 .30 .50

Total .60 .40 1.00

Probabilities

2.050.0

10.0

)(

)()(

TP

TIBMPTIBMP

Probability that a project is undertaken by IBM given it is a telecommunications project:

Contingency Table - Example 2-2Contingency Table - Example 2-2

2-26

P A B P A

P B A P B

and

P A B P A P B

( ) ( )

( ) ( )

( ) ( ) ( )

Conditions for the statistical independence of events A and B:

P Ace HeartP Ace Heart

P Heart

P Ace

( )( )

( )

( )

1521352

113

P Heart AceP Heart Ace

P Ace

P Heart

( )( )

( )

( )

1524

52

14

)()(52

1

52

13*

52

4)( HeartPAcePHeartAceP

2-5 Independence of Events2-5 Independence of Events

2-27

0976.00024.006.004.0

)()()()()

0024.006.0*04.0

)()()()

BTPBPTPBTPb

BPTPBTPa

0976.00024.006.004.0

)()()()()

0024.006.0*04.0

)()()()

BTPBPTPBTPb

BPTPBTPa

Events Television (T) and Billboard (B) are assumed to be independent.

Independence of Events – Independence of Events – Example 2-5Example 2-5

2-28

The probability of the union of several independent events is 1 minus the product of probabilities of their complements:

P A A A An P A P A P A P An( ) ( ) ( ) ( ) ( )1 2 3

11 2 3

Example 2-7:

6513.03487.011090.01

)10()3()2()1(1)10321(

QPQPQPQPQQQQ

The probability of the intersection of several independent events is the product of their separate individual probabilities:

P A A A An P A P A P A P An( ) ( ) ( ) ( ) ( )1 2 3 1 2 3

Product Rules for Independent EventsProduct Rules for Independent Events

2-29

Consider a pair of six-sided dice. There are six possible outcomes from throwing the first die {1,2,3,4,5,6} and six possible outcomes from throwing the second die {1,2,3,4,5,6}. Altogether, there are 6*6 = 36 possible outcomes from throwing the two dice.

In general, if there are n events and the event i can happen in Ni possible ways, then the number of ways in which the

sequence of n events may occur is N1N2...Nn.

Pick 5 cards from a deck of 52 - with replacement 52*52*52*52*52=525 380,204,032 different

possible outcomes

Pick 5 cards from a deck of 52 - without replacement

52*51*50*49*48 = 311,875,200 different possible outcomes

2-6 Combinatorial Concepts2-6 Combinatorial Concepts

2-30

.

..

. .Order the letters: A, B, and C

A

B

C

B

C

A

B

A

C A

C

B

C

B

A

. ....

.

..

..

.ABC

ACB

BAC

BCA

CAB

CBA

More on Combinatorial ConceptsMore on Combinatorial Concepts(Tree Diagram)(Tree Diagram)

2-31

How many ways can you order the 3 letters A, B, and C?

There are 3 choices for the first letter, 2 for the second, and 1 for the last, so there are 3*2*1 = 6 possible ways to order the threeletters A, B, and C.

How many ways are there to order the 6 letters A, B, C, D, E, and F? (6*5*4*3*2*1 = 720)

Factorial: For any positive integer n, we define n factorial as:n(n-1)(n-2)...(1). We denote n factorial as n!. The number n! is the number of ways in which n objects can be ordered. By definition 1! = 1 and 0! = 1.

FactorialFactorial

2-32

Permutations are the possible ordered selections of r objects out of a total of n objects. The number of permutations of n objectstaken r at a time is denoted by nPr, where

What if we chose only 3 out of the 6 letters A, B, C, D, E, and F?There are 6 ways to choose the first letter, 5 ways to choose the second letter, and 4 ways to choose the third letter (leaving 3letters unchosen). That makes 6*5*4=120 possible orderings orpermutations.

1204*5*61*2*3

1*2*3*4*5*6

!3

!6

)!36(

!6

:

36

P

exampleFor

rnnrPn )!(!

Permutations (Order is important)Permutations (Order is important)

2-33

Combinations are the possible selections of r items from a group of n itemsregardless of the order of selection. The number of combinations is denotedand is read as n choose r. An alternative notation is nCr. We define the numberof combinations of r out of n elements as:

Suppose that when we pick 3 letters out of the 6 letters A, B, C, D, E, and F we chose BCD, or BDC, or CBD, or CDB, or DBC, or DCB. (These are the6 (3!) permutations or orderings of the 3 letters B, C, and D.) But these are orderings of the same combination of 3 letters. How many combinations of 6different letters, taking 3 at a time, are there?

206

120

1 * 2 * 3

4 * 5 * 6

1) * 2 * 1)(3 * 2 * (3

1 * 2 * 3 * 4 * 5 * 6

!3!3

!6

)!36(!3

!6

:

36

C

exampleFor

r

n

r)!(nr!

n!C

r

nrn

n

r

Combinations (Order is not Important)Combinations (Order is not Important)

2-34

Example: Template for Calculating Example: Template for Calculating Permutations & CombinationsPermutations & Combinations

2-35

P A P A B P A B( ) ( ) ( )

In terms of conditional probabilities:

More generally (where Bi make up a partition):

P A P A B P A BP A B P B P A B P B

( ) ( ) ( )( ) ( ) ( ) ( )

P A P A Bi

P ABi

P Bi

( ) ( )

( ) ( )

2-7 The Law of Total Probability and 2-7 The Law of Total Probability and Bayes’ TheoremBayes’ Theorem

The law of total probability:

2-36

Event U: Stock market will go up in the next yearEvent W: Economy will do well in the next year

P U W

P U W

P W P W

P U P U W P U WP U W P W P U W P W

( ) .

( )

( ) . ( ) . .

( ) ( ) ( )( ) ( ) ( ) ( )

(. )(. ) (. )(. ). . .

75

30

80 1 8 2

75 80 30 2060 06 66

The Law of Total Probability-The Law of Total Probability-Example 2-9Example 2-9

2-37

• 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 B AP A B

P A

P A B

P A B P A B

P AB P B

P AB P B P AB P B

( )( )

( )

( )

( ) ( )

( ) ( )

( ) ( ) ( ) ( )

Applying the law of total probability to the denominator

Applying the definition of conditional probability throughout

Bayes’ TheoremBayes’ Theorem

2-38

• 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 [ ] The event is a false negative

When administered to a person who is not ill, the test will erroneously give a positive result (false positive) with probability 0.04 [ ] The event is a false positive. .

P I( ) .0 001

08.)(92.)( IZPIZP

)( IZ

)( IZ

96.0)(04.0)( IZPIZP

Bayes’ Theorem - Example 2-10Bayes’ Theorem - Example 2-10

2-39

P I

P I

P Z I

P Z I

( ) .

( ) .

( ) .

( ) .

0001

0999

092

004

P I ZP I Z

P Z

P I Z

P I Z P I Z

P Z I P I

P Z I P I P Z I P I

( )( )

( )

( )

( ) ( )

( ) ( )

( ) ( ) ( ) ( )

(. )( . )

(. )( . ) ( . )(. )

.

. .

.

..

92 0001

92 0001 004 999

000092

000092 003996

000092

040880225

Example 2-10 (continued)Example 2-10 (continued)

2-40

P I( ) .0001

P I( ) .0999 P Z I( ) .004

P Z I( ) .096

P Z I( ) .008

P Z I( ) .092 P Z I( ) ( . )( . ) . 0 001 0 92 00092

P Z I( ) ( . )( . ) . 0 001 0 08 00008

P Z I( ) ( . )( . ) . 0 999 0 04 03996

P Z I( ) ( . )( . ) . 0 999 0 96 95904

Prior Probabilities

Conditional Probabilities

JointProbabilities

Example 2-10 (Tree Diagram)Example 2-10 (Tree Diagram)

2-41

• Given a partition of events B1,B2 ,...,Bn:

P B AP A B

P A

P A B

P A B

P A B P B

P A B P B

i

i i

( )( )

( )

( )

( )

( ) ( )

( ) ( )

1

1

1

1 1

Applying the law of total probability to the denominator

Applying the definition of conditional probability throughout

Bayes’ Theorem ExtendedBayes’ Theorem Extended

2-42

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:H - High growth P(H) = 0.30M - Moderate growth P(M) = 0.50L - Low growth P(L) = 0.20

Event A Appreciation

P A HP A MP A L

( ) .( ) .( ) .

0 700 40

0 20

Bayes’ Theorem Extended -Bayes’ Theorem Extended -Example 2-11Example 2-11

2-43

P H AP H A

P AP H A

P H A P M A P L AP A H P H

P A H P H P A M P M P A L P L

( )( )

( )( )

( ) ( ) ( )( ) ( )

( ) ( ) ( ) ( ) ( ) ( )( . )( . )

( . )( . ) ( . )( . ) ( . )( . ).

. . ...

.

0 70 0 300 70 0 30 0 40 050 0 20 0 20

0 210 21 0 20 0 04

0 210 45

0 467

Example 2-11 (continued)Example 2-11 (continued)

2-44

Prior Probabilities

Conditional Probabilities

JointProbabilities

P H( ) . 0 30

P M( ) . 0 50

P L( ) . 0 20

P A H( ) . 0 70

P A H( ) .0 30

P A M( ) .0 40

P A M( ) . 0 60

P A L( ) . 0 20

P A L( ) . 0 80

P A H( ) ( . )( . ) . 0 30 0 70 0 21

P A H( ) ( . )( . ) . 0 30 0 30 0 09

P A M( ) ( . )( . ) . 0 50 0 40 0 20

P A M( ) ( . )( . ) . 0 50 0 60 0 30

P A L( ) ( . )( . ) . 0 20 0 20 0 04

P A L( ) ( . )( . ) . 0 20 0 80 0 16

Example 2-11 (Tree Diagram)Example 2-11 (Tree Diagram)

2-45

2-8 The Joint Probability Table2-8 The Joint Probability Table

A joint probability table is similar to a contingency table , except that it has probabilities in place of frequencies.

The joint probability for Example 2-11 is shown below. The row totals and column totals are called marginal probabilities.

2-46

The Joint Probability TableThe Joint Probability Table

A joint probability table is similar to a contingency table , except that it has probabilities in place of frequencies.

The joint probability for Example 2-11 is shown on the next slide. The row totals and column totals are called marginal probabilities.

A joint probability table is similar to a contingency table , except that it has probabilities in place of frequencies.

The joint probability for Example 2-11 is shown on the next slide. The row totals and column totals are called marginal probabilities.

2-47

The Joint Probability Table:The Joint Probability Table:Example 2-11Example 2-11

The joint probability table for Example 2-11 is summarized below.

High Medium Low TotalTotal

$ Appreciates 0.21 0.2 0.04 0.45

$Depreciates 0.09 0.3 0.16 0.55

TotalTotal 0.30 0.5 0.20 1.00

Marginal probabilities are the row totals and the column totals.Marginal probabilities are the row totals and the column totals.

2-48

2-8 Using Computer: Template for Calculating 2-8 Using Computer: Template for Calculating the Probability of at least one successthe Probability of at least one success

2-492-8 Using Computer: Template for Calculating 2-8 Using Computer: Template for Calculating the Probabilities from a Contingency the Probabilities from a Contingency Table-Example 2-11Table-Example 2-11

2-50

2-8 Using Computer: Template for Bayesian 2-8 Using Computer: Template for Bayesian Revision of Probabilities-Example 2-11 Revision of Probabilities-Example 2-11

2-51

2-8 Using Computer: Template for Bayesian 2-8 Using Computer: Template for Bayesian Revision of Probabilities-Example 2-11 Revision of Probabilities-Example 2-11

Continuation of output from previous slide.Continuation of output from previous slide.