Probability

Business Statistics
Probability
• A probability is a quantitative measure of uncertainty - a number
that conveys the strength of our belief in the occurrence of an
uncertain event.
SOME BASIC CONCEPTS
• Probability, in common parlance, refers to the chance of occurrence of
an event or happening.
• In order that we are able to compute it, a proper understanding of
certain basic concepts in probability theory is required. These concepts
are an experiment, a sample space, and an event.
• EXPERIMENT : An experiment is a process that leads to one of several
possible outcomes. An outcome of an experiment is some observation or
measurement.
• The experiments in probability theory have three things in common:
1. there are two or more outcomes of each experiment
2. it is possible to specify the outcomes in advance
3. there is uncertainty about the outcomes
• The sample space is the universal set S pertinent to a given
experiment. It is the set of all possible outcomes of an experiment.
EVENT :
• An event, in probability theory, constitutes one or more possible outcomes of
an experiment.
• An event is a subset of a sample space. It is a set of basic outcomes. We say
that the event occurs if the experiment gives rise to a basic outcome
belonging to the event.
• For the experiment of drawing a card, we may obtain different events A, B,
and C like:
A : The event that card drawn is king of club
B : The event that card drawn is red
C : The event that card drawn is ace
In the first case, out of the 52 sample points that constitute the sample space,
only one sample point or outcome defines the event, whereas the number of
outcomes used in the second and third case is 26 and 4 respectively.
APPROACHES TO PROBABILITY
•THEORY
Three different approaches to the definition and interpretation of probability have
evolved, mainly to cater to the three different types of situations under which
probability measures are normally required. We will study these approaches with the
help of examples of distinct types of experiments.
• Consider the following situations marked by three distinct types of experiments. The
events that we are interested in, within these experiments, are also given.
Situation I
Experiment : Drawing a Card Out of a Deck of 52 Cards
Event A : On any draw, a king is there
Situation II
Experiment : Administering a Taste Test for a New Soup
Event B : A consumer likes the taste
Situation III
Experiment : Commissioning a Solar Power Plant
Event C : The plant turns out to be a successful venture
Situation I : THE CLASSICAL APPROACH
The first situation is characterized by the fact that for a given experiment we have a
sample space with equally likely basic outcomes. When a card is drawn out of a
well-shuffled deck, every one of the cards (the basic outcomes) is as likely to occur
as any other. This type of situations, marked by the presence of "equally likely"
outcomes, gave rise to the Classical Approach to the probability theory. In the
Classical Approach, probability of an event is defined as the relative size of the
event with respect to the size of the sample space. Since there are 4 kings and
there are 52 cards, the size of A is 4 and the size of the sample space is 52.
Therefore, the probability of A is equal to 4/52.
The rule we use in computing probabilities, assuming equal likelihood of all basic
outcomes, is as follows:
Probability of the event A:
where n(A) = the number of outcomes favorable to the event A
n(S) = total number of outcomes
Situation II : THE RELATIVE FREQUENCY APPROACH
If we try to apply the classical definition of probability in the second experiment, we find
that we cannot say that consumers will equally like the taste of the soup. Moreover, we
do not know as to how many persons have been tested. This implies that we should
have the past data on people who were administered the soup and the number that
liked the taste. In the absence of past data, we have to undertake an experiment, where
we administer the taste test on a group of people to check its effect
The Relative Frequency Approach is used to compute probability in such cases. As per
this approach, the probability of occurrence of an event is given by the observed relative
frequency of an event in a very large number of trials. In other words, the probability of
occurrence of an event is the ratio of the number of times the event occurs to the total
number of trials. The probability of the event B:
Where n = the number of times the event occurs
N = total number of trials
It is appreciated in this approach that, in order to take such a measure, we should have
the soup tested for a large number of people. In other words, the total number of trials
in the experiment should be very large.
Situation III : THE SUBJECTIVE APPROACH
The third situation seems apparently similar to the second one. We may be tempted here to apply the
Relative Frequency Approach. We may calculate the probability of the event that the venture is a success as
the ratio of number of successful ventures to the total number of such ventures undertaken i.e. the relative
frequency of successes will be a measure of the probability.
However, the calculation here presupposes that either
(a) it is possible to do an experiment with such ventures, or
(b) that past data on such ventures will be available
In practice, a solar power plant being a relatively new development involving the latest technology, past
experiences are not available. Experimentation is also ruled out because of high cost and time involved,
unlike the taste testing situation. In such cases, the only way out is the Subjective Approach to probability. In
this approach, we try to assess the probability from our own experiences. We may bring in any information to
assess this. In the situation cited, we may, perhaps, look into the performance of the commissioning authority
in other new and related technologies. Therefore the Subjective Approach involves personal judgment,
information, intuition, and other subjective evaluation criteria. A physician assessing the probability of a
patient's recovery and an expert assessing the probability of success of a merger offer are both making a
personal judgment based upon what they know and feel about the situation. The area of subjective
probability - which is relatively new, having been first developed in the 1930s – is somewhat controversial.
One person's subjective probability may very well be different from another person's subjective probability of
the same event. We may note here that since the assessment is a purely subjective one, it will vary from
person to person and, therefore, subjective probability is also called Personal Probability.
Three Approaches – A Comparative View
As already noted, the different approaches have evolved to cater to different
kinds of situations. So these approaches are not contradictory to one another. In
fact, these complement each other in the sense that where one fails, the other
becomes applicable. These are identical inasmuch as probability is defined as a
ratio or a weight assigned to the occurrence of an event. However, in contrast to
the Subjective measure of the third approach, the first two approaches - Classical
and Relative Frequency - provide an objective measure of probability in the sense
that no personal judgment is involved.
A fair coin is tossed twice. Find the probabilities of the following events:
(a) A, getting two heads
(b) B, getting one head and one tail
(c) C, getting at least one head or one tail
(d) D, getting four heads
Solution:
HH HT TH TT
Thus, for the sample space N(S) = 4
We can use the Classical Approach to find out the required probabilities.
(a) For the event A, the number of favorable cases are: n(A) = 1 { HH }
So the required probability
(b) For the event B, the number of favorable cases are: n(B) = 2 { HT, TH }
So the required probability

(c) For the event C, the number of favorable cases are:n(C) = 4 { HH, HT, TH, TT }
So the required probability
(d) For the event D, the number of favorable cases are: n(D) = 0
So the required probability

It may be noted that the occurrence of C is certainty, whereas D is an impossible

event.
A newspaper boy wants to find out the chances that on any day he will be able
to sell more than 90 copies of The Times of India. From his dairy where he
recorded the daily sales of the last year, he finds out that out of 365 days, on 75
days he had sold 80 copies, on 144 days he had sold 85 copies, on 62 days he
had sold 95 copies and on 84 days he had sold 100 copies of The Times of India.
Find out the required probability for the newspaper boy.
Solution: Taking the Relative Frequency Approach, we find:

Thus, the number of days when his sales were more than 90 = (62 + 84) days =
146 days So the required probability
The probability of an event A, written as P(A), must be a number between zero
and one, both values inclusive. Thus 0 ≤ P(A) ≤ 1
If two events are such that occurrence of one implies that the other cannot
occur, then the probability that either one or the other will occur is equal to the
sum of their individual probabilities. Thus, in a coin-tossing situation, the
occurrence of a head rules out the possibility of occurrence of tail. These events
are called mutually exclusive events. In such cases then, if A and B are the two
events respectively, then P (A or B) = P (A) + P (B)
i.e. P(Head or Tail) = P (Head) + P (Tail)
P(A or B) = P(A) + P(B) = 1; thus P (Head) + P (Tail) = 1
If two or more events together define the total sample space, the events are said
to be collectively exhaustive.
THE UNION RULE
A very important rule in probability theory, the Rule of Unions (also called
Addition Theorem) allows us to write the probability of the union of two
events in terms of the probabilities of the two events and the probability of
their intersection. Consider two events A and B defined over the sample
space S
Thus, the rule of unions is:
P ( A ∪ B ) = P ( A) + P (B ) − P ( A ∩ B )

The probability of the intersection of two events P ( A ∩ B ) is called their joint

probability. The meaning of this rule is very simple and intuitive: When we add
the probabilities of A and B, we are measuring, or counting, the probability of
their intersection twice—once when measuring the relative size of A within the
sample space and once when doing this with B.
Since the relative size, or probability, of the intersection of the two sets is
counted twice, we subtract it once so that we are left with the true probability
of the union of the two events.
The rule of unions is especially useful when we do not have the sample space for
the union of events but do have the separate probabilities.
A card is drawn from a well-shuffled pack of playing cards. Find the probability
that the card drawn is either a club or a king.

Solution: Let A be the event that a club is drawn and B the event that a king is
drawn. Then,
P ( A ∪ B ) = P ( A) + P (B ) − P ( A ∩ B )
= 13/52 + 4/52 – 1/52
= 16/52
= 4/13
Suppose your chance of being offered a certain job is 0.45, your probability of
getting another job is 0.55, and your probability of being offered both jobs is
0.30. What is the probability that you will be offered at least one of the two
jobs?
Solution: Let A be the event that the first job is offered and B the event that the
second job is offered. Then,
P ( A) = 0.45 P (B ) = 0.55 and P ( A ∩ B ) = 0.30
So, the required probability is given as:
P ( A ∪ B ) = P ( A) + P (B ) − P ( A ∩ B )
= 0.45 + 0.55 – 0.30
= 0.70
Mutually Exclusive Events
When the sets corresponding to two events are disjoint (i.e., have no intersection), the two events are called
mutually exclusive

For mutually exclusive events, the probability of the intersection of the events is zero. This is
so because the intersection of the events is the empty set, and we know that the probability of
the empty set is zero.
For mutually exclusive events A and B:
P(A∩B)=0
This fact gives us a special rule for unions of mutually exclusive events. Since the probability
of the intersection of the two events is zero, there is no need to subtract P ( A ∩ B ) when
the probability of the union of the two events is computed. Therefore,
For mutually exclusive events A and B:
P ( A ∪ B ) = P ( A) + P (B )
A card is drawn from a well-shuffled pack of playing cards. Find the probability
that the card drawn is either a king or a queen.
Solution: Let A be the event that a king is drawn and B the event that a queen is
drawn. Since
A and B are two mutually exclusive events, we have,
P ( A ∪ B ) = P ( A) + P (B )
= 4/52 + 4/52
= 8/52
= 2/13
We can extend the Rule of Unions to three (or more) events. Let A, B, and C be
the three events defined over the sample space S, as shown in the figure
Then, the Rule of Unions is
P(A∪B∪C)=
P ( A) + P (B ) + P (C ) − P ( A ∩ B ) − P (B ∩ C ) − P ( A ∩ C ) + P ( A ∩ B ∩ C )

When the three events are mutually exclusive (see Figure 8-6), the Rule of
Unions is
P ( A ∪ B ∪ C ) = P ( A) + P (B ) + P (C )
A card is drawn from a well-shuffled pack of playing cards. Find the probability
that the card drawn is
(a) either a heart or an honour or king
(Honour cards are 10, J, Q, K, A. In a deck of 52 cards there are 20 honour cards,
5 in every suit.)
(b) either an ace or a king or a queen

Solution: (a) Let A be the event that a heart is drawn, B the event that an honour
is drawn and C the event that a king is drawn. So we have
n(A) = 13 n(B) = 20 n(C) = 4
n ( A ∩ B ) = 5 n (B ∩ C ) = 4 n(A∩C)=1
and n ( A ∩ B ∩ C ) = 1
The required probability is
P ( A ∪ B ∪ C ) = 13/52 + 20/52 + 4/52 – 5/52 – 4/52 – 1/52 +1/52
= 28/52
= 7/13

(b) Let A be the event that an ace is drawn, B the event that a king is drawn and C
the event that a queen is drawn. So we have
n(A) = 4 n(B) = 4 n(C) = 4
Since A, B and C are mutually exclusive events, the required probability is
P ( A ∪ B ∪ C ) = 4/52 + 4/52 + 4/52
= 12/52
= 3/13
THE COMPLEMENT RULE
The Rule of Complements defines the probability of the complement of an event
in terms of the probability of the original event. Consider event A defined over
the sample space S. The complement of set A, denoted by A , is a subset, which
contains all outcomes, which do not belong to A
As a simple example, if the probability of rain tomorrow is 0.3, then the
probability of no rain tomorrow must be 1 - 0.3 = 0.7.

If the probability of drawing a king is 4/52, then the probability of the drawn
card's not being a king is 1 - 4/52 = 48/52.

Find the probability of the event of getting a total of less than 12 in the
experiment of throwing a die twice.
Solution: Let A be the event of getting a total 12.
Then we have,
A = {6,6} and P(A) = 1/36
The event of getting a total of less than 12 is the complement of A, so the
required probability is
THE CONDITIONAL PROBABILITY RULE
As a measure of uncertainty, probability depends on information. We often face
situations where the probability of an event A is influenced by the information
that another event B has occurred. Thus, the probability we would give the event
"Xerox stock price will go up tomorrow" depends on what we know about the
company and its performance; the probability is conditional upon our
information set. If we know much about the company, we may assign a different
probability to the event than if we know little about the company. We may define
the probability of event A conditional upon the occurrence of event B. In this
example, event A may be the event that the stock will go up tomorrow, and
event B may be a favorable quarterly report.
Consider two events A and B defined over the sample space S

Thus, the probability of event A given the occurrence of event B is

The vertical line in P ( A / B ) is read given, or conditional upon. Therefore, the probability of
event A given the occurrence of event B is defined as the probability of the intersection of A
and B, divided by the probability of event B.

For an experiment of throwing a die twice, find the probability:

(a) of the event of getting a total of 9, given that the die has shown up points between 4 and
6 (both inclusive)
(b) of the event of getting points between 4 and 6 (both inclusive), given that a total of 9 has
already been obtained
Solution: Let getting a total 9 be the event A and the die showing points between 4 and 6
(both inclusive) be the event B
Thus, N(S) = 36 and A = {(3,6) (4,5) (5,4) (6,3)}
B = {(4,4) (4,5) (4,6) (5,4) (5,5) (5,6) (6,4) (6,5) (6,6)}
and P ( A ∩ B ) = {(4,5) (5,4)}
So n(A) = 4 n(B) = 9 n(A∩B)=2
So the required probabilities are
THE PRODUCT RULE
The Product Rule (also called Multiplication Theorem) allows us to write the
probability of the simultaneous occurrence of two (or more) events.
In the conditional probability rules

A ∩ B or B ∩ A is the event A and B occur simultaneously. So rearranging the

conditional probability rules, we have our Product Rule
P ( A ∩ B ) = P ( A / B ).P (B )

and P ( A ∩ B ) = P (B / A).P ( A)
The Product Rule states that the probability that both A and B will occur
simultaneously is equal to the probability that B (or A) will occur multiplied by
the conditional probability that A (or B) will occur, when it is known that B (or A)
is certain to occur or has already occurred.
A box contains 10 balls out of which 2 are green, 5 are red and 3 are black. If two
balls are drawn at random, one after the other without replacement, from the
box. Find the probabilities that:
(a) both the balls are of green color
(b) both the balls are of black color
(c) both the balls are of red color
(d) the first ball is red and the second one is black
(e) the first ball is green and the second one is red
BAYES’ THEOREM
We will first understand The Law of Total Probability, which is helpful for
derivation of Bayes' Theorem
The Law of Total Probability
Consider two events A and B. Whatever may be the relation between the two
events, we can always say that the probability of A is equal to the probability of
the intersection of A and B, plus the probability of the intersection of A and the
complement of B (event B ).
The sets B and B form a partition of the sample space. A partition of a space is
the division of the sample space into a set of events that are mutually exclusive
(disjoint sets) and cover the whole space. Whatever event B may be, either B or
B must occur, but not both.
BAYES’ THEOREM
We will now develop the Bayes’ theorem. Bayes' theorem is easily
derived from the law of total probability and the definition of
conditional probability.
By definition of conditional probability, we have

Substituting ,we have