Introduction to Probability

• Random Experiments, Counting Rules, and Assigning

Probabilities
• Events and Their Probability
• Some Basic Relationships of Probability
• Conditional Probability
• Bayes’ Theorem

1
Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
 Uncertainties
• Managers often base their decisions on an analysis of
uncertainties such as the following:
• What are the chances that the sales will decrease if we increase
prices?
• What is the likelihood a new assembly method will increase
productivity?
• What are the odds that a new investment will be profitable?

2
Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
 Probability
• Probability is a numerical measure of the likelihood that an event will occur.
• Probability values are always assigned on a scale from 0 to 1.
• A probability near zero indicates an event is quite unlikely to occur.
• A probability near one indicates an event is almost certain to occur.

Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
 Statistical Experiments
• In statistics, the notion of an experiment differs somewhat
from that of an experiment in the physical sciences.
• In statistical experiments, probability determines outcomes.
• Even though the experiment is repeated exactly the same
way, an entirely different outcome may occur.
• For this reason, statistical experiments are sometimes called
random experiments.

4
Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
 Random Experiment and Its Sample Space
• A random experiment is a process that generates well-defined experimental
outcomes.
• The sample space for an experiment is the set of all experimental outcomes.
• An experimental outcome is also called a sample point.
• On any single repetition or trial, the outcome that occurs is determined completely
by chance
Experiment Experimental Outcomes
Toss a coin Head, tail
Inspect a part Defective, non-defective
Conduct a sale call Purchase, no purchase
Roll a die 1, 2, 3, 4, 5, 6
Play a football game Win, lost, tie
Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
 Probability
Sample space of an experiment is denoted 𝑆𝑆.
The sample space contains all possible outcomes of the experiment.
For example, Letter grades in a course: 𝑆𝑆 = 𝐴𝐴, 𝐵𝐵, 𝐶𝐶, 𝐷𝐷, 𝐹𝐹 , Passing a
course or not: 𝑆𝑆 = {𝑃𝑃, 𝐹𝐹}

An event is any subset of the outcomes of the experiment.

A simple event, if it contains a single outcome, may contain several
outcomes. For example, a passing grade, 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = {𝐴𝐴, 𝐵𝐵, 𝐶𝐶, 𝐷𝐷}, Tossing
a coin

Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
 Mutually Exclusive Events
• Events that cannot occur Examples:
simultaneously. 1.Flipping a Coin:
• If one event happens, the other 1.Event A: Getting heads.
cannot. 2.Event B: Getting tails.

• Mutually exclusive events have no overlap. 2.Rolling a Die:

• Probability of both events happening 1.Event A: Rolling a 3.
together: P(A∩B) = 0. 2.Event B: Rolling a 6.
• Probability of either event happening:
P(A∪B)=P(A)+P(B) 3.Drawing a Card:
1.Event A: Drawing a heart.
2.Event B: Drawing a club.
 Exhaustive events
•A set of events is exhaustive if they
cover all possible outcomes.
•At least one of the events must occur. For example,
Sample space for throwing a dice once S= 1,2,3,4,5, 6
X= event for the number that appear on the dice less
• Flipping a Coin:
than 4 = 1,2,3
Event A: Getting heads. Y= event for the number that appear on the dice
Event B: Getting tails. greater than 2 and less than 5= 3,4
Z= event for the number that appear on the dice
These events are exhaustive because the coin must land greater than 4 = 5,6
on either heads or tails.
• Rolling a Die: – Here, 𝑿𝑿 ∪ 𝒀𝒀 ∪ 𝒁𝒁 = 𝟏𝟏, 𝟐𝟐, 𝟑𝟑, 𝟒𝟒, 𝟓𝟓, 𝟔𝟔 = 𝑺𝑺
Events: Rolling a 1, 2, 3, 4, 5, or 6.
These events are exhaustive because the die must land
on one of these six faces.
 Probability
We can define events based on one or more outcomes of the experiment and also combine
events to form new events.

Venn Diagram
Sample space S with a rectangle
Two circles to represent the events A and B

Union of two events

Denoted 𝐴𝐴 ∪ 𝐵𝐵
All outcomes in A or B (or both)
The portion in the Venn diagram that is included in either A or B
 Probability

Intersection of two events

Denoted 𝐴𝐴 ∩ 𝐵𝐵
All outcomes in A and B
The portion in the Venn diagram that is included in both A and B, the overlap
 Probability

Complement of an event A
Denoted 𝐴𝐴𝑐𝑐
All outcomes in the sample space S that are not in A
The portion in the Venn diagram that is everything in S that is not included in A
 Practice Problem
You roll a die with the sample space S = {1, 2, 3, 4, 5, 6}. You define A as
{1, 2, 3}, B as {1, 2, 3, 5, 6}, C as {4, 6}, and D as {4, 5, 6}. Determine
which of the following events are exhaustive and/or mutually exclusive.

a. A and B
b. A and C
c. A and D
d. B and C
 Solution
a. 𝐴𝐴 ∪ 𝐵𝐵 = {1, 2, 3, 5, 6 } ≠ {1, 2, 3, 4, 5, 6} = 𝑆𝑆; the events 𝐴𝐴 and 𝐵𝐵 are not
exhaustive.
𝐴𝐴 ∩ 𝐵𝐵 = {1,2,3}; the events A and B are not mutually exclusive.

b. 𝐴𝐴 ∪ 𝐶𝐶 = {1, 2, 3, 4, 6 } ≠ {1, 2, 3, 4, 5, 6} = 𝑆𝑆; the events 𝐴𝐴 and 𝐶𝐶 are not

exhaustive.
𝐴𝐴 ∩ 𝐶𝐶 = ∅; the events A and C are mutually exclusive.

c. 𝐴𝐴 ∪ 𝐷𝐷 = {1, 2, 3, 4, 5, 6 } = 𝑆𝑆; the events 𝐴𝐴 and 𝐷𝐷 are exhaustive.

𝐴𝐴 ∩ 𝐷𝐷 = ∅; the events A and D are mutually exclusive.

d. 𝐵𝐵 ∪ 𝐶𝐶 = {1, 2, 3, 4, 5, 6 } = 𝑆𝑆; the events 𝐴𝐴 and 𝐶𝐶 are exhaustive.

𝐵𝐵 ∩ 𝐶𝐶 = {6}; the events B and C are not mutually exclusive.
 Practice Problem

Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
Solution
 Practice Problem
A survey of magazine subscribers showed that 45.8% rented a car
during the past 12 months for business reasons, 54% rented a car
during the past 12 months for personal reasons, and 30% rented a car
during the past 12 months for both business and personal reasons.
a. What is the probability that a subscriber rented a car during the past
12 months for business or personal reasons?
b. What is the probability that a subscriber did not rent a car during
the past 12 months for either business or personal reasons?

Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
Solution
 Probability
Properties of probability

1. The probability of an event A is a value between 0 and 1; that is, 0 ≤ 𝑃𝑃(𝐴𝐴) ≤ 1.

2. The sum of the probabilities of any list of mutually exclusive and exhaustive events
equals 1.

There are three types of probabilities.

Subjective: calculated by drawing on personal and subjective judgement

Empirical: calculated as a relative frequency of occurrence
Classical: based on logical analysis

Empirical and classical probabilities do not vary, they are often grouped as objective
probabilities.
 Rules of Probability
1. Complement rule 2. Addition rule
Used to find the probability of the union of two
Follows from one of the defining properties of events
probability: 𝑃𝑃 𝐴𝐴 + 𝑃𝑃 𝐴𝐴𝑐𝑐 = 1 The probability that A or B occurs, or that at least
Rearrange: 𝑃𝑃 𝐴𝐴𝑐𝑐 = 1 − 𝑃𝑃(𝐴𝐴) one of these events occurs
𝑃𝑃 𝐴𝐴 ∪ 𝐵𝐵 = 𝑃𝑃 𝐴𝐴 + 𝑃𝑃 𝐵𝐵 − 𝑃𝑃 𝐴𝐴 ∩ 𝐵𝐵

𝑃𝑃 𝐴𝐴 ∩ 𝐵𝐵 is double-counted in both 𝑃𝑃 𝐴𝐴 and

𝑃𝑃 𝐵𝐵
𝑃𝑃 𝐴𝐴 ∩ 𝐵𝐵 is referred to as the joint probability
 Rules of Probability
For mutually exclusive events A and B, the probability of their
intersection is zero 𝑃𝑃 𝐴𝐴 ∩ 𝐵𝐵 = 0.

A B

𝑃𝑃 𝐴𝐴 ∪ 𝐵𝐵 = 𝑃𝑃 𝐴𝐴 + 𝑃𝑃 𝐵𝐵
 Conditional probability
In business applications, the probability of interest is often a
conditional probability.

Examples include :

the probability that the customer will make an online purchase

conditional on receiving an e-mail with a discount offer
the probability of making a six-figure salary conditional on
getting an MBA
and the probability that sales will improve conditional on the firm
launching a new marketing campaign.
 Conditional Probability
Context Discrimination Case:
Promotion status of male and female officers •Committee of female officers raised a case:
• 288 male officers promoted.
in a major metropolitan police force in the
• Only 36 female officers promoted.
eastern United States. Police Administration Argument:
Total officers: 1200 •Low number of promotions for female officers due to
• Men: 960 fewer female members in the police force, not
• Women: 240 discrimination.
Promotions in the past two years: 324
Promotion Breakdown (Table 4.4):
•Male officers promoted: 288 Promotion Status of Police Officers Over the Past Two Years

•Female officers promoted: 36

Using Conditional Probability to Analyze the Case:

•Objective: Show how conditional probability can be used to
evaluate the discrimination charge.
•Approach: Calculate and compare the probability of
promotion for male and female officers given their
representation in the police force.
Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
 Conditional Probability
Let
• M = event an officer is a man
• W = event an officer is a woman
• A = event an officer is promoted
• Ac = event an officer is not promoted

Joint probabilities

The values in the margins of the joint probability table provide the probabilities of each event
separately. That is, P(M) = .80, P(W) = .20, P(A) = .27, and P(Ac) = .73. These probabilities are
referred to as marginal probabilities because of their location in the margins of the joint
probability table.

P(A) = P(M ∩ A) + P(W ∩ A) = .24 + .03 = .27.

To calculate P(A ∣ M), we first realize that this notation simply means that we are considering the probability of the event A (promotion) given that the condition designated as event M (the
officer is a man) is known to exist.

Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
 Conditional Probability

Critical Conditional Probabilities:

P(A∣M): Probability of promotion given the officer is male.
P(A∣W): Probability of promotion given the officer is
female.
Key Points:
•If P(A∣M)=P(A∣W), no basis for discrimination.
•If P(A∣M)≠P(A∣W), supports discrimination argument.

Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
 Conditional probability
The conditional probability that A occurs given that B has occurred is
𝑃𝑃(𝐴𝐴∩𝐵𝐵)
derived as 𝑃𝑃 𝐴𝐴 𝐵𝐵 =
𝑃𝑃(𝐵𝐵)

Because 𝑃𝑃 𝐴𝐴 𝐵𝐵 is conditional on B (B has occurred), the sample

space reduces to B.

𝑃𝑃 𝐴𝐴 𝐵𝐵 is the 𝐴𝐴 ∩ 𝐵𝐵 portion in the Venn diagram that is included in 𝐵𝐵.

𝑃𝑃(𝐴𝐴∩𝐵𝐵)
Similarly, 𝑃𝑃 𝐵𝐵 𝐴𝐴 =
𝑃𝑃(𝐴𝐴)
 Independent Event

Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
 Multiplication rule of Probability

We can find the joint probability as the product of

probabilities using the conditional probability formula;
this is the multiplication rule.

The joint probability of events A and B is derived as

𝑃𝑃 𝐴𝐴 ∩ 𝐵𝐵 = 𝑃𝑃 𝐴𝐴 𝐵𝐵 𝑃𝑃 𝐵𝐵
 Probability
Two events are independent if the occurrence of one event
does not affect the probability of the occurrence of the other
event.
Events are considered dependent if the occurrence of one is
related to the probability of the occurrence of the other event.

Two events, A and B, are independent if

𝑃𝑃 𝐴𝐴 𝐵𝐵 = 𝑃𝑃(𝐴𝐴) or, equivalently,
Multiplication rule of
Independent event

𝑃𝑃 𝐴𝐴 ∩ 𝐵𝐵 = 𝑃𝑃 𝐴𝐴 𝑃𝑃 𝐵𝐵 .
 Practice Problem
Suppose that for a given year there is a 2% chance that
your desktop computer will crash and a 6% chance that
your laptop computer will crash. Moreover, there is a
0.12% chance that both computers will crash. Is the
reliability of the two computers independent of each
other?
 Solution
Let D represent the outcome that your desktop crashes,
𝑃𝑃 𝐷𝐷 = 0.02
Let L represent the outcome that your laptop crashes, 𝑃𝑃 𝐿𝐿 =
0.06
The joint probability is 𝑃𝑃(𝐷𝐷 ∩ 𝐿𝐿) = 0.0012
𝑃𝑃(𝐷𝐷∩𝐿𝐿) 0.0012
Calculate 𝑃𝑃 𝐷𝐷 𝐿𝐿 = = = 0.02
𝑃𝑃(𝐿𝐿) 0.06
So, 𝑃𝑃 𝐷𝐷 𝐿𝐿 = 𝑃𝑃 𝐷𝐷 . If your laptop crashes, it does not alter
the probability that your desktop also crashes
The reliability of the two computers is independent
 Practice Problem
Let P(A) = 0.65, P(B) = 0.30, and P(A | B) = 0.45.
a. Calculate P(A ∩ B).
b. Calculate P(A ∪ B).
c. Calculate P(B | A).

Consider the following probabilities: P(A) = 0.40, P(B) = 0.50,

and P(AC ∩ BC ) = 0.24. Find:
a. P(AC | BC)
b. P(AC ∪ BC)
c. P(A ∪ B)
Hint for part C: 𝑃𝑃 (𝐴𝐴𝑐𝑐 ∩ 𝐵𝐵𝑐𝑐) = 𝑃𝑃 ((𝐴𝐴 ∪ 𝐵𝐵) 𝑐𝑐) = 1 − 𝑃𝑃(𝐴𝐴 ∪ 𝐵𝐵) = 0.24.
Solution
 Solution

a. 0.48
b. 0.86
c. 0.76.
 Practice Problem
An analyst estimates that the probability of default on a seven- year AA-rated
bond is 0.06, while that on a seven-year A-rated bond is 0.13. The probability
that they will both default is 0.04.

a. What is the probability that at least one of the bonds defaults?

b. What is the probability that neither the seven-year AA-rated bond nor the
seven-year A-rated bond defaults?
c. Given that the seven-year AA-rated bond defaults, what is the probability that
the seven-year A-rated bond also defaults?
 Solution
𝑃𝑃(𝐴𝐴) = 0.06, 𝑃𝑃(𝐵𝐵) = 0.13, and 𝑃𝑃 (𝐴𝐴 ∩ 𝐵𝐵) = 0.04

a. 𝑃𝑃 (𝐴𝐴 ∪ 𝐵𝐵) = 𝑃𝑃(𝐴𝐴) + 𝑃𝑃(𝐵𝐵) – 𝑃𝑃 (𝐴𝐴 ∩ 𝐵𝐵) = 0.06 + 0.13 − 0.04 =

0.15

b. 𝑃𝑃 ((𝐴𝐴 ∪ 𝐵𝐵)𝑐𝑐) = 1 − 𝑃𝑃(𝐴𝐴 ∪ 𝐵𝐵) = 1 − 0.15 = 0.85

 Contingency tables and probabilities
A contingency table is useful when examining the relationship
between two categorical variables.

It shows the frequencies for two categorical variables, x and y.

Each cell represents a mutually exclusive combination of the
pair of x and y values.

We can estimate an empirical probability by calculating the

relative frequency to the occurrence of the event.
 Practice Problem
Consider the following contingency table.

A B BC
A 26 34
AC 14 26

a. Convert the contingency table into a joint probability table.

b. What is the probability that A occurs?
c. What is the probability that A and B occur?
d. Given that B has occurred, what is the probability that A occurs?
e. Given that Ac has occurred, what is the probability that B occurs?
f. Are A and B mutually exclusive events? Explain.
g. Are A and B independent events? Explain.
 Solution
B 𝐵𝐵𝑐𝑐 Total
A
0.26 0.34 0.60
𝐴𝐴𝑐𝑐
0.14 0.26 0.40
Total
0.40 0.60 1
 Contingency Tables and Probabilities
Enrollment and age group from the introductory case

• What is the probability that a randomly selected attendee enrolls in the fitness center?
• What is the probability that a randomly selected attendee is over 50 years old?
• What is the probability that a randomly selected attendee enrolls in the fitness center
and is over 50 years old?
• What is the probability that an attendee enrolls in the fitness center, given the attendee
is over 50 years old?
 Solution

Let E denote the event of enrolling in the fitness center.

Let O denote the event of being over 50 years old.
a.What is the probability that a randomly selected attendee enrolls in the fitness center?
140
𝑃𝑃 𝐸𝐸 = = 0.35
400
b. What is the probability that a randomly selected attendee is over 50 years old?
132
𝑃𝑃 𝑂𝑂 = = 0.33
400
 Solution

c. What is the probability that a randomly selected attendee enrolls in the fitness center and is over
50 years old?
44
𝑃𝑃 𝐸𝐸 ∩ 𝑂𝑂 = = 0.11
400
d. What is the probability that an attendee enrolls in the fitness center, given the attendee is over 50
years old?
44
𝑃𝑃 𝐸𝐸 𝑂𝑂 = = 0.33
132

𝑃𝑃(𝐸𝐸∩𝑂𝑂) 0.11
𝑃𝑃 𝐸𝐸 𝑂𝑂 = = = 0.33
𝑃𝑃(𝑂𝑂) 0.33
 Practice Problem
Apple products have become a household name in America. Suppose that the likelihood of
Owning an Apple product is 61% for households with kids and 48% for households without
kids. Suppose there are 1,200 households in a representative community, of which 820 are with
kids and the rest are without kids.

a. Are the events “household with kids” and “household without kids” mutually exclusive and
exhaustive? Explain.

b. What is the probability that a household is without kids?

c. What is the probability that a household is with kids and owns an Apple product?

d. What is the probability that a household is without kids and does not own an Apple product?
Practice Problem
 Joint Probability
Let X and Y be two events in a sample space. Then the joint
probability of the two events, written as P(X ∩ Y), is given by

Number of observations in 𝐗𝐗 ∩ 𝐘𝐘
𝐏𝐏𝐗𝐗 ∩ 𝐘𝐘 ) =
Total number of observations
Total probability rule and Bayes’ Theorem
The total probability rule expresses the probability of an event, 𝐴𝐴, in terms of
probabilities of the intersection of 𝐴𝐴 with any mutually exclusive and exhaustive
events.

The total probability rule based on two events, 𝐵𝐵 and 𝐵𝐵𝑐𝑐 , is given by 𝑃𝑃 𝐴𝐴 =
𝑃𝑃 𝐴𝐴 ∩ 𝐵𝐵 + 𝑃𝑃 𝐴𝐴 ∩ 𝐵𝐵𝑐𝑐 .
Total probability rule and Bayes’ Theorem
Bayes’ theorem is a procedure for updating probabilities based on new
information; it uses the total probability rule.

The original probability is an unconditional probability called a prior probability,

in the sense that it reflects only what we know before the arrival of new
information.

On the basis of new information, we update the prior probability to arrive at a

conditional probability called a posterior probability.

The posterior probability 𝑃𝑃 𝐵𝐵|𝐴𝐴 can be found using the information on the prior
probability 𝑃𝑃 𝐵𝐵 along with conditional probabilities as
Probability Revision Using Bayes’ Theorem

Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
 Terms for Bayes Theorem components

• The prior probability (estimate of the probability without any further information) is denoted by P(B).

• P(B|A) is known as the posterior probability (that is, given that event, A has occurred, what is the
probability that event B will occur). That is, given the new information (or additional evidence) that
A has occurred, what is the projected chance of B occurring?

• P(A|B) denotes the likelihood of observing evidence A if B is true.

• P(A) represents the prior probability of A.

Application of Bayes’
Prior Probabilities New Information Posterior Probabilities
Theorem
Total probability rule and Bayes’ Theorem
The posterior probability 𝑃𝑃 𝐵𝐵|𝐴𝐴 can be found using the information
on the prior probability 𝑃𝑃 𝐵𝐵 along with conditional probabilities as

𝑃𝑃(𝐴𝐴 ∩ 𝐵𝐵) 𝑃𝑃(𝐴𝐴 ∩ 𝐵𝐵)

𝑃𝑃 𝐵𝐵|𝐴𝐴 = = 𝑐𝑐
=
𝑃𝑃(𝐴𝐴) 𝑃𝑃 𝐴𝐴 ∩ 𝐵𝐵 + 𝑃𝑃(𝐴𝐴 ∩ 𝐵𝐵 )

𝑃𝑃(𝐴𝐴|𝐵𝐵)𝑃𝑃(𝐵𝐵)
𝑃𝑃 𝐴𝐴|𝐵𝐵 𝑃𝑃(𝐵𝐵) + 𝑃𝑃 𝐴𝐴|𝐵𝐵𝑐𝑐 𝑃𝑃(𝐵𝐵𝑐𝑐 )
Total probability rule and Bayes’ Theorem
The analysis to include an n mutually exclusive and exhaustive events
𝐵𝐵1 , 𝐵𝐵2 , ⋯ , 𝐵𝐵𝑛𝑛 can be included as follows:
For the extended case, Bayes’ theorem, for any i = 1, 2, . . ., n, is

𝑃𝑃(𝐴𝐴 ∩ 𝐵𝐵𝑖𝑖 ) 𝑃𝑃(𝐴𝐴 ∩ 𝐵𝐵𝑖𝑖 )

𝑃𝑃 𝐵𝐵𝑖𝑖 |𝐴𝐴 = =
𝑃𝑃(𝐴𝐴) 𝑃𝑃 𝐴𝐴 ∩ 𝐵𝐵1 + 𝑃𝑃 𝐴𝐴 ∩ 𝐵𝐵2 + ⋯ + 𝑃𝑃(𝐴𝐴 ∩ 𝐵𝐵𝑛𝑛 )

𝑃𝑃(𝐴𝐴|𝐵𝐵𝑖𝑖 )𝑃𝑃(𝐵𝐵𝑖𝑖 )
𝑃𝑃 𝐵𝐵𝑖𝑖 |𝐴𝐴 =
𝑃𝑃 𝐴𝐴|𝐵𝐵1 𝑃𝑃 𝐵𝐵1 + 𝑃𝑃 𝐴𝐴|𝐵𝐵2 𝑃𝑃 𝐵𝐵2 + ⋯ + 𝑃𝑃 𝐴𝐴|𝐵𝐵𝑛𝑛 𝑃𝑃 𝐵𝐵𝑛𝑛
 Revising Probabilities with New Information
Revising Probabilities with New Information
Initial Phase of Analysis:
• Begin with initial or prior probability estimates for events of interest.
Obtaining Additional Information:
• Sources: samples, special reports, product tests.
Updating Probabilities:
• Calculate revised probabilities (posterior probabilities) using Bayes’ theorem.
Example Scenario:
• Manufacturing Firm:
• Receives parts from two suppliers (Supplier 1 and Supplier 2).
• 65% of parts from Supplier 1 (P(A1) = 0.65).
• 35% of parts from Supplier 2 (P(A2) = 0.35).
Quality Variance:
• Historical data indicates varying quality ratings between suppliers.
• Conditional probability values provided (Table 4.6).
Bayes’ Theorem:
• Tool for updating prior probabilities with new information.
Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
 Two-Supplier Example
Tree Diagram for Two-Supplier Example
Historical Quality Levels
of Two Suppliers

Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
Probability Tree for Two-Supplier Example

Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
 Probability Calculation Using Bayes’ Theorem

Scenario:
•Machine breaks down due to a bad part. Conditional Probabilities:
•P(B|A1): Probability of a bad part from Supplier 1.
Objective: •P(B|A2): Probability of a bad part from Supplier 2.
•Determine the probability that the bad part
came from Supplier 1. Using Bayes' Theorem:
•Determine the probability that the bad part •Calculate P(A1|B): Probability part is from Supplier 1
came from Supplier 2. given it is bad.
•Calculate P(A2|B): Probability part is from Supplier 2
Given: given it is bad.
•P(A1): Probability part is from Supplier 1.
•P(A2): Probability part is from Supplier 2. Probability Tree :
•Visual aid to understand and calculate revised
probabilities.

Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
 Bayes’ Theorem

Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
 Tabular Approach to Bayes’ Theorem Calculations
Step 1. Prepare the following three columns:
Column 1— The mutually exclusive events Ai for which posterior probabilities are desired
Column 2— The prior probabilities P(Ai) for the events
Column 3— The conditional probabilities P(B ∣ Ai) of the new information B given each event
Step 2. In column 4, compute the joint probabilities P(Ai ∩ B) for each event and the new information B by using the multiplication law. These joint
probabilities are found by multiplying the prior probabilities in column 2 by the corresponding conditional probabilities in column 3; that is, P(Ai ∩ B) =
P(Ai)P(B ∣ Ai).
Step 3. Sum the joint probabilities in column 4. The sum is the probability of the new information, P(B). Thus, we see in the Table below that there is a
.0130 probability that the part came from supplier 1 and is bad and a .0175 probability that the part came from supplier 2 and is bad. Because these are
the only two ways in which a bad part can be obtained, the sum .0130 + .0175 shows an overall probability of .0305 of finding a bad part from the
combined shipments of the two suppliers.
Step 4. In column 5, compute the posterior probabilities using the basic relationship of conditional probability.
• P(Ai | B) = P(Ai ∩ B)/P(B)
Note that the joint probabilities P(Ai ∩ B) are in column 4 and the probability P(B) is the sum of column 4.

Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
Practice Problem
Solution
 Practice Problem

Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
Solution
 Practice Problem
Christine has always been weak in mathematics. Based on her performance prior
to the final exam in Calculus, there is a 40% chance that she will fail the course if
she does not have a tutor. With a tutor, her probability of failing decreases to 10%.
There is only a 50% chance that she will find a tutor at such short notice.

a. What is the probability that Christine fails the course?

b. Christine ends up failing the course. What is the probability that she had found
a tutor?
Solution
 Practice Problem
ParFore created a website to market golf equipment and golf apparel. Management would like
a special pop-up offer to appear for female website visitors and a different special pop-up offer
to appear for male website visitors. From a sample of past website visitors, ParFore’s
management learned that 60% of the visitors are male and 40% are female.
a. What is the probability that a current visitor to the website is female?
b. Suppose 30% of ParFore’s female visitors previously visited the Dillard’s department store
website and 10% of ParFore’s male visitors previously visited the Dillard’s department store
website. If the current visitor to ParFore’s website previously visited the Dillard’s website,
what is the revised probability that the current visitor is female? Should the ParFore’s website
display the special offer that appeals to female visitors or the special offer that appeals to male
visitors?

Source: Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., and Cochran, J. J. (2018). Statistics for Business & Economics. Cengage learning.
Solution