Introduction to Probability and

Bayes’ Theorem
FOUNDATION TERM
Quantitative Methods – 2023
Session 3

Gunjan Malhotra
[email protected] ; [email protected]
Lecture notes prepared by Dr Gunjan R Malhotra, IMT Ghaziabad 1
Lecture notes prepared by Dr Gunjan R Malhotra,
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IMT Ghaziabad
Lecture notes prepared by Dr Gunjan R Malhotra,
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 Probability in Business

� Risk and uncertainty

are present in every
aspect of a business

� Probability allows us to
analyze patterns in
data and make
predictions using the
analysis

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 Life is uncertain and full of surprise…..
Do you know what happen tomorrow?

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 Fundamental Probability Concept

• A probability is a numerical value that measures

the likelihood that an uncertain event occurs.

• The value of a probability is between zero

(0) and one (1).
 A probability of zero indicates impossible
events.
 A probability of one indicates definite events.

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 Probability

• In a discrete sample space, the probabilities of all

simple events must sum to unity:
• P(S) = P(E1) + P(E2) + … + P(En) = 1
• For example, The Big Bazaar/Walmart customer’s
payment method might have four outcomes:
credit card: 32% P(credit card) = .32
debit card: 20% P(debit card) = .20
Probability
cash: 30% P(cash) = .30
check: 18% P(check) = .18
Sum = 100%
Lecture notes prepared by Dr Gunjan R Sum = 1.0 16
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 Fundamentals of Probability
● An example highlighting Gambler’s fallacy.
● A gambler predicts that his next roll of the dice will be lucky 7
because he did not get that outcome on the last three rolls. The
demo should conclude explaining basic concepts of probability, and
how each experiment has unique results independent of previous or
future outcomes.
● An Experiment is by which an outcome is obtained
● A sample space is the set of all possible outcomes of an
event or an experiment.
● An event is a subset of a sample space.
● E.g.: E1: When an even number is chosen. E2: When an odd number is
chosen.
● In a discrete sample space, the sum of all probabilities must
be equal to one.
● An example highlighting the sum of all probabilities in a
sample space being equal to one.
● A customer at Big Bazar can choose one of the four payment
methods example.
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Types of Probability or Assigning Probability

• Objective or Classical or Theoretical Probability Assessment

Number of ways A can occur

P(A) = Total number of possible outcomes

 Empirical Probability or Relative Frequency of

Occurrence
the number of outcomes in A
Relative Freq. of event A [P(A)] = the number of outcomes in Sample
space (S)
 Subjective Probability Assessment
An opinion or judgment by a decision maker about the likelihood of an
event. Subjective probability may differ from person to person
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 Examples on Assigning Probability
Objective or Classical Empirical Probability or Subjective Probability
Probability Assessment Relative Frequency of Assessment
Occurrence
Probability of a day chosen to estimate the default A media development
from the year lying in the rate on student loans: P(a team assigns a 60%
month of July = 31/365 student defaults) = f /n = probability of success to
number of defaults /
Males = 10 and Female = 5 its new ad campaign.
number of loans
in a group. Now suppose
we need to select 2 The chief media officer of
persons. What is the the company is less
probability that a girl will to estimate the reliability
optimistic and assigns a
be selected? of a bar code scanner –
P(a missed scan) = 40% of success to the
number of missed scans / same campaign
number of items scanned

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 Theoretical Probability/ Priori probability
With theoretical probability, you do not actually conduct an
experiment. Instead, you use what you know about the
situation to determine the probability of an event occurring.
You may use your reasoning skills or an existing formula to
arrive at your answer.

A priori probability refers to the likelihood of an event

occurring when there is a finite amount of outcomes and
each is equally likely to occur.

number of favorable outcomes n(E)

P(E) =
total number of outcomes = n(S)

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 Example
In a cricket match the Sachin hit a boundary 5 times out of 30 balls he plays. Find the
probability that he (i) hit a boundary (ii) do not hit a boundary.
Solution
• Total number of balls Sachin played = 30
• Number of boundary hit = 5
• Number of times he did not hit a boundary = 30 - 5 = 25

(i) Probability that he hit a boundary

number of favorable outcomes 5 1
P(E) = =
total number of outcomes = 30 = 6 0.167
25 5
(ii) Probability that he did not hit a boundary =
30 = 6
= 0.833

This probability is theoretical as no experiment was performed

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 Example of a priori probability
When randomly selecting a day from the year 2018 what is the
probability the day is in January?

𝑋 number of days in January

Probability of Day In January = =
𝑇 total number of days in 2018

𝑋
=
𝑇
31 days in January
=
365 days in 2018
31
= 0.08
365 Lecture notes prepared by Dr Gunjan R
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 Empirical or Experimental Probability
When you gather data from observations during an
experiment, you will be calculating an empirical (or
experimental) probability.
The experimental probability of occurring of an
event is the ratio of the number of trials in which
the event occurred to the total number of trials.

number of times event E occurs

P(E) ͌ number of times the experiment was
performed

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Example
A cup is flipped 100 times. It lands on its side 84 times, on its bottom 6
times, and on its top 10 times. What is the probability that it lands on
it top?
number of top outcomes 10 1
P(top) =
total number of flips = 100 = 10

The probability obtained is experimental or empirical as the cup was

actually flipped

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 Example of empirical probability

Find the probability of selecting a male taking statistics from the population
described in the following table:

Taking Stats Not Taking Stats Total

Male 84 145 229
Female 76 134 210
Total 160 279 439

84
Probability of male taking stats = number of males taking stats = = 0.191
total number of people 439

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 Probability – Events Involving “Not” and “Or”
Events Involving “Not”
Probability of a Complement
The probability that an event E will not occur is equal to one minus the
probability that it will occur.
P(not E) = 1 – P(E) P(E) = 1 – P(E)
Other forms of the equation:
P(E) + P(E) = 1
P(E) = 1 – P(E)
What is the probability of not drawing an ace from a standard deck of 52 cards?
P(not an ace) = 1 – P(ace)
P(not an ace) = 1 – (4/52)
P(not an ace) = 48/52 = 12/13

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 Mutually Exclusive Events
• Mutually exclusive events:
– Events that cannot occur simultaneously.

• If A and B are mutually exclusive events then

the probability of A happening OR the
probability of B happening is P(A) + P(B).
P(A or B) = P(A) + P(B)
• The sum of all mutually exclusive outcomes is 1.

Example: Randomly choosing a day from 2022

A = day in January; B = day in February
– Events A and B are mutually exclusive.

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Example
• The probabilities of three teams A, B and C winning a badminton
1 1 1
competition are , and respectively
3 5 9

Calculate the probability that

a) either A or B will win
b) either A or B or C will win
c) none of these teams will win
d) neither A nor B will win

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Solution/s

c) P(none will win) = 1 – P(A or B or C will win)

d) P(neither A nor B will win) = 1 – P(either A or B will win)

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 Collectively Exhaustive Events
• Collectively exhaustive events:
– One of the events must occur.
– The set of events covers the entire sample space.

Example: Randomly choose a day from 2018.

A = Weekday; B = Weekend;
C = January; D = Spring;
– Events A, B, C and D are collectively exhaustive (but not mutually
exclusive – a weekday can be in January or in Spring).
– Events A and B are collectively exhaustive and also mutually exclusive.

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 Joint Probability: Definition & Computing
• Joint Probability refers to the probability of an occurrence of two or
more events (joint event).
– ex. P(Plan to Purchase and Purchase).
– ex. P(No Plan and Purchase).

number of outcomes satisfying A and B

P( A and B ) 
total number of outcomes

P(Plan to Purchase and Purchase) = 200 / 1000

Actually Purchased TV
Planned To Purchase TV Yes No Total
Yes 200 50 250
No 100 650 750
Total 300 700 1,000

P(No Plan and Purchase) = 50 / 1000

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 Rules for Computing Probabilities
Rules of Addition
• Special Rule of Addition - If two events
A and B are mutually exclusive, the
probability of one or the other event’s
occurring equals the sum of their
probabilities.
P(A or B) = P(A) + P(B)

• The General Rule of Addition - If A and

B are two events that are not mutually
exclusive, then
P(A or B) = P(A) + P(B) - P(A and B)

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 Example Problem 1: The addition rule

• Let the small assembly plant with 50 employees.

Each worker is expected to complete work
assignments on time and in such a way that the
assembled product will pass a final inspection. On
occasion, some of the five of the 50 workers fail to
meet the performance standards by completing work
late or six of the 50 workers assembling a defective
product. At the end of a performance evaluation
period, the production manager found that 2 of the
50 workers completed both completed work late
and assembled a defective product. What is the
probability to receive poor performance rating?

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 Example Solution 1

• Let L = the event that work is completed late

• D = the event that the assembled product is
defective
• P (L ꓴ D) = P(L) + P(D) – P(L∩ D)
= 5/50 + 6/50 – 2/50
= .10 + .12 - .04
= .18
There is .18 probability that a randomly selected
employee received a poor performance rating.
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 Example Problem 2

• Consider a recent study conducted by the personnel

manager of a major computer software company. The
study showed that 30% of the employees who left the
firm within two years did so primarily because they were
dissatisfied with their salary, 20% left because they were
dissatisfied with their work assignments, and 12% of the
former employees indicated dissatisfaction with both
their salary and their work assignments. What is the
probability that an employee who leaves within two
years does so because of dissatisfaction with salary ,
dissatisfaction with the work assignment, or both?
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 Example Solution 2

• Let S = the event that the employee leaves because

of salary
• W = the event that the employee leaves because of
work assignment
• P (S ꓴ W) = P(S) + P(W) – P (S ∩ W)
= 30/100 + 20/100 – 12/100
= .3 + .2 - .12
= .38
We find .38 probability that an employee leaves for
salary or work assignment reasons
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Example 3: The addition rule for mutually
exclusive events
Samantha Greene, a college senior, contemplates her
future immediately after graduation. She thinks there is a
25% chance that she will join the Peace Corps and a 35%
chance that she will enroll in a full-time law school
program in the United States.
a. What is the probability that she joins Peace Corps or
enrolls in law school?
P A B   P  A   P  B   0.25  0.35  0.60

B. What is the probability that she does not choose

either of these options?
P  A B
C
  1 P  A B   1  0.60  0.40

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 Conditional Probability

 Conditional Probability
 The probability of an event given that another
event has already occurred.
 For example, P(A) = probability of finding a job,
and P(B) = probability of prior work experience
 P(A | B) = probability of finding a job given prior
work experience.

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 Calculating a Conditional Probability
Given two events A and B, each with a positive probability of
occurring, the probability that A occurs given that B has
occurred ( A conditioned on B ) is equal to

P A B
P  A | B 
P B 

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 Example Problem 4.
• Consider the situation of the promotion status of male
and female officers of a major metropolitan police force
in the eastern United States. The police force consists of
1200 officers, 960 men and 240 women. Over the past
two years, 324 officers on the police force received
promotions. The specific breakdown of promotions for
male and female officers is in table:
Men Women Total
Promoted 288 36 324
Not 672 204 876
Promoted
Total 960 240 1200
A. Identify the marginal and joint probabilities.
B. What is the probability that an officer is promoted given
that the officer is Lecture
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 Example Solution 4.
A. Let M = event an officer is a man
• W = event an officer is a woman
• P = event an officer is promoted
• NP = event an officer is not promoted
• P (M ∩ P) = 288/1200 = .24
• P (M ∩ NP) = 672/1200 = .56
• P (W ∩ P) = 36/1200 = .03 Men Women Total
• P (W ∩ NP) = 204/1200 = .17 Promoted .24 .03 .27
• P(M) = 960/1200 = 0.8 Not .56 .17 .73
• P(W) = 240/1200 = 0.2 Promoted
• P(P) = 324/1200 = .27
• P(NP) = 876/1200 = .73 Total .80 .20 1

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 Example Solution 4 .. Cont..

• B. Conditional Probability =
joint probability/ marginal probability
• P(P/M) = P(P ∩ M) / P (M)
= (288/1200) / (960/1200)
= .24 / .80
= .30

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Example Problem 5: Conditional Probabilities

An economist predicts a 60% chance that country A will

perform poorly economically and a 25% chance that
country B will perform poorly economically. There is also
a 16% chance that both countries will perform poorly.
a. What is the probability that country A performs poorly
given that country B performs poorly?
 Let P(A) = 0.60, P(B) = 0.25, and P(A ∩ B) = 0.16

P A B 0.16
P  A | B    0.64
P B  0.25

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 Multiplication Rule:
Independent and Dependent Events
 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.

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 Example Problem 6.
• A study released by BG Research for SEIKO found that
28% of American adults believe that the automated
teller has had a most significant impact on everyday
life. Another study by DM for DC Associates
examined employee views on team spirit in the
workplace and discovered that 72% of all employees
believe that working as a part of a team lowers
stress. Are people’s views on automated tellers
independent of their views on team spirit in the
workplace?

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 Example Solution 6.
• If they are independent, then the probability of a
person being randomly selected who believes that
the automated teller has had a most significant
impact on everyday life and that working as part of a
team lowers stress is found as follows.
• Let P( A) = .28 ; P (S) = .72
• P (A ∩ S) = (A) . P (S) = (.28) (.72) = .2016
• Therefore, 20.16% of the population believes that
the automated teller has had a most significant
impact on everyday life and that working as part of a
team lowers stress.
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 Example Problem 7.

• A manufacturing firm produces pads of bound paper.

Three percent of all paper pads produced are
improperly bound. An inspector randomly samples
two pads of paper, one at a time. Because a large
number of pads are being produced during the
inspection, the sampling being done, in essence, is
with replacement. What is the probability that the
two pads selected are both improperly bound?

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 Example Solution 7.

• Let A1 denote improperly bound pad 1

• Let A2 denote improperly bound pad 2
• Because the sampling is done with replacement, the
two events are independent. Hence
• P(A1 ∩ A2) = P(A1) P(A2)
= (.03) (.03)
= .0009

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 Bayes’ Theorem

A procedure for updating probabilities based on new

information.
 Prior probability is the original (unconditional or marginal)

probability (e.g., P(B) ).

 Posterior probability is the updated (conditional) probability

(e.g., P(B | A) ).

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• Thank you for your attention!

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