Introduction to

Probability
Introduction to Probability
• Learning Objectives:
• Experiments, Counting Rules, and Assigning Probabilities
• Events and Their Probability
• Some Basic Relationships of Probability
• Conditional Probability
• Bayes’ Theorem

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Uncertainties
• Managers often base their decisions on an analysis of uncertainties such
as the following:
• What are the chances that 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?

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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.

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Probability as a Numerical Measure
of the Likelihood of Occurrence
Increasing Likelihood of Occurrence

Probability: 0 .5 1

The event The occurrence The event

is very of the event is is almost
unlikely just as likely as certain
to occur. it is unlikely. to occur.

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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 in exactly the same way, an
entirely different outcome may occur.
• For this reason, statistical experiments are sometimes called random
experiments.

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An Experiment and Its Sample
Space
• An experiment is any process that generates well-defined outcomes.
• The sample space for an experiment is the set of all experimental outcomes.
• An experimental outcome is also called a sample point.

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An Experiment and Its Sample
Space
Experiment Experimental Outcomes
Toss a coin Head, tail

Inspection of a part Defective, not Defective

Conduct a sales call Converted, not converted

Roll a die 1,2,3,4,5,6

Play a football game Win, lose, tie

A Counting Rule for Multiple-Step
Experiments
• If an experiment consists of a sequence of k steps in which there are n1
possible results for the first step, n2 possible results for the second step, and
so on, then the total number of experimental outcomes is given by (n1)
(n2) . . . (nk).
• A helpful graphical representation of a multiple-step experiment is a tree
diagram.

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An Experiment and Its Sample
Space
• Example: Bradley Investments
Bradley has invested in two stocks, Markley Oil and Collins
Mining. Bradley has determined that the possible outcomes of
these investments three months from now are as follows.
Investment Gain or Loss
in 3 Months (in $1000s)
Markley Oil Collins Mining
10 8
5 -2
0
-20

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A Counting Rule for Multiple-Step Experiments
• Example: Bradley Investments
• Bradley Investments can be viewed as a two-step experiment. It
involves two stocks, each with a set of experimental outcomes.

Markley Oil: n1 = 4
Collins Mining: n2 = 2
Total Number of
Experimental Outcomes: n1n2 = (4)(2) = 8

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Tree Diagram
• Example: Bradley Investments
Markley Oil Collins Mining Experimental
(Stage 1) (Stage 2) Outcomes
Gain 8
(10, 8) Gain $18,000
(10, -2) Gain $8,000
Gain 10 Lose 2
Gain 8 (5, 8) Gain $13,000

Lose 2 (5, -2) Gain $3,000

Gain 5
Gain 8
(0, 8) Gain $8,000
Even
(0, -2) Lose $2,000
Lose 20 Lose 2
Gain 8 (-20, 8) Lose $12,000

Lose 2 (-20, -2) Lose $22,000

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Counting Rule for Combinations
• Number of Combinations of N Objects Taken n at a Time
• A second useful counting rule enables us to count the number
of experimental outcomes when n objects are to be selected
from a set of N objects.
=

where: N! = N(N - 1)(N - 2) . . . (2)(1)

n! = n(n - 1)(n - 2) . . . (2)(1)
0! = 1

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Counting Rule for Permutations
• Number of Permutations of N Objects Taken n at a Time
• A third useful counting rule enables us to count the number of
experimental outcomes when n objects are to be selected from a set of
N objects, where the order of selection is important.

where: N! = N(N - 1)(N - 2) . . . (2)(1)

n! = n(n - 1)(n - 2) . . . (2)(1)
0! = 1

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Assigning Probabilities
• Basic Requirements for Assigning Probabilities
1. The probability assigned to each experimental outcome must be
between 0 and 1, inclusively.
0 < P(Ei) < 1 for all i

where: Ei is the i th experimental outcome

and P(Ei) is its probability

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Assigning Probabilities
• Basic Requirements for Assigning Probabilities
2. The sum of the probabilities for all experimental outcomes must equal 1.

P(E1) + P(E2) + . . . + P(En) = 1

where: n is the number of experimental outcomes

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Methods of Assigning Probabilities
1. The Classical Method

2. The Relative Frequency Method

3. The subjective Method

Classical Method
• Example: Rolling a Die
If an experiment has n possible outcomes, the classical method
would assign a probability of 1/n to each outcome.
Experiment: Rolling a die
Sample Space: S = {1, 2, 3, 4, 5, 6}
Probabilities: Each sample point has a 1/6 chance of occurring

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Relative Frequency Method
• Example: Lucas Tool Rental
Lucas Tool Rental would like to assign probabilities to the number of car
polishers it rents each day. Office records show the following frequencies of
daily rentals for the last 40 days.
Number of Number
Polishers Rented of Days
0 4
1 6
2 18
3 10
4 2

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Relative Frequency Method
• Example: Lucas Tool Rental
Each probability assignment is given by dividing the frequency
(number of days) by the total frequency (total number of
days).
Number of Number
Polishers Rented of Days Probability
0 4 .10 = 4/40
1 6 .15
2 18 .45
3 10 .25
4 2 .05
40 1.00

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Subjective Method
• When economic conditions or a company’s circumstances change rapidly it
might be inappropriate to assign probabilities based solely on historical data.
• We can use any data available as well as our experience and intuition, but
ultimately a probability value should express our degree of belief that the
experimental outcome will occur.
• The best probability estimates often are obtained by combining the estimates
from the classical or relative frequency approach with the subjective estimate.

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Subjective Method
• Example: Bradley Investments
An analyst made the following probability estimates.
Exper. Outcome Net Gain or Loss Probability
(10, 8) $18,000 Gain .20
(10, -2) $8,000 Gain .08
(5, 8) $13,000 Gain .16
(5, -2) $3,000 Gain .26
(0, 8) $8,000 Gain .10
(0, -2) $2,000 Loss .12
(-20, 8) $12,000 Loss .02
(-20, -2) $22,000 Loss .06
1.00
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Events and Their Probabilities
• An event is a collection of sample points.
• The probability of any event is equal to the sum of the probabilities of the
sample points in the event.
• If we can identify all the sample points of an experiment and assign a
probability to each, we can compute the probability of an event.

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Events and Their Probabilities
• Example: Bradley Investments
Event M = Markley Oil Profitable
M = {(10, 8), (10, -2), (5, 8), (5, -2)}
P(M) = P(10, 8) + P(10, -2) + P(5, 8) + P(5, -2)
= .20 + .08 + .16 + .26
= .70

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Events and Their Probabilities
• Example: Bradley Investments
Event C = Collins Mining Profitable
C = {(10, 8), (5, 8), (0, 8), (-20, 8)}
P(C) = P(10, 8) + P(5, 8) + P(0, 8) + P(-20, 8)
= .20 + .16 + .10 + .02
= .48

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Some Basic Relationships of
Probability
• There are some basic probability relationships that can be used to compute the
probability of an event without knowledge of all the sample point probabilities.
Complement of an Event
Union of Two Events
Intersection of Two Events

Mutually Exclusive Events

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Complement of an Event
• The complement of event A is defined to be the event consisting of all
sample points that are not in A.
• The complement of A is denoted by Ac.

Sample
Event A Ac Space S

Venn Diagram

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Union of Two Events
• The union of events A and B is the event containing all sample points that
are in A or B or both.
• The union of events A and B is denoted by A  B.

Sample
Event A Event B Space S

Venn Diagram

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Union of Two Events
• Example: Bradley Investments
Event M = Markley Oil Profitable
Event C = Collins Mining Profitable
M  C = Markley Oil Profitable
or Collins Mining Profitable (or both)
M  C = {(10, 8), (10, -2), (5, 8), (5, -2), (0, 8), (-20, 8)}
P(M  C) = P(10, 8) + P(10, -2) + P(5, 8) + P(5, -2) + P(0, 8) + P(-20, 8)
= .20 + .08 + .16 + .26 + .10 + .02
= .82

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Intersection of Two Events
• The intersection of events A and B is the set of all sample points that are in
both A and B.
• The intersection of events A and B is denoted by A  B.
Intersection of A and B

Sample
Event A Event B Space S

Venn Diagram

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Intersection of Two Events
• Example: Bradley Investments
Event M = Markley Oil Profitable
Event C = Collins Mining Profitable
M  C = Markley Oil Profitable and Collins Mining Profitable
M  C = {(10, 8), (5, 8)}
P(M  C) = P(10, 8) + P(5, 8)
= .20 + .16
= .36

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Addition Law
• The addition law provides a way to compute the probability of event A, or
B, or both A and B occurring.
• The law is written as:
P(A  B) = P(A) + P(B) - P(A  B)

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Addition Law
• Example: Bradley Investments
Event M = Markley Oil Profitable
Event C = Collins Mining Profitable
M  C = Markley Oil Profitable or Collins Mining Profitable
We know: P(M) = .70, P(C) = .48, P(M  C) = .36
Thus: P(M  C) = P(M) + P(C) - P(M  C)
= .70 + .48 - .36
= .82
(This result is the same as that obtained earlier
using the definition of the probability of an event.)

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Mutually Exclusive Events
• Two events are said to be mutually exclusive if the events have no sample
points in common.
• Two events are mutually exclusive if, when one event occurs, the other
cannot occur.

Sample
Event A Event B Space S

Venn Diagram

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Conditional Probability
• The probability of an event given that another event has occurred is called a
conditional probability.
• The conditional probability of A given B is denoted by P(A|B).
• A conditional probability is computed as follows :
𝑃 ( 𝐴∩ 𝐵)
𝑃 ( 𝐴| 𝐵 )=
𝑃 ( 𝐵)

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Conditional Probability
• Example: Bradley Investments
Event M = Markley Oil Profitable
Event C = Collins Mining Profitable
P(C|M) = Collins Mining Profitable given Markley Oil Profitable
We know: P(M  C) = .36, P(M) = .70

Thus: =

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Multiplication Law
• The multiplication law provides a way to compute the probability of the
intersection of two events.
• The law is written as:
P(A  B) = P(B)P(A|B)

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Multiplication Law
• Example: Bradley Investments
Event M = Markley Oil Profitable
Event C = Collins Mining Profitable
M  C = Markley Oil Profitable and Collins Mining Profitable
We know: P(M) = .70, P(C|M) = .5143
Thus: P(M  C) = P(M)P(C|M)
= (.70)(.5143)
= .36
(This result is the same as that obtained earlier
using the definition of the probability of an event.)

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Joint Probability Table
Men Women Total
promoted 288 36 324
Not promoted 672 204 876
Total 960 240 1200

Men Women Total

Promoted 0.24 0.03 0.27
Not promoted 0.56 0.17 0.73
Total 0.80 0.20 1
Joint probability Table
• Joint probabilities appear in the body of the table
• Marginal probabilities appear in the margins of the table
Independent Events
• If the probability of event A is not changed by the existence of event B,
we would say that events A and B are independent.
• Two events A and B are independent if:
P(A|B) = P(A) or P(B|A) = P(B)

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Multiplication Law for Independent Events
• The multiplication law also can be used as a test to see if two events are
independent.
• The law is written as:
P(A  B) = P(A)P(B)

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Multiplication Law for Independent Events
• Example: Bradley Investments
Event M = Markley Oil Profitable
Event C = Collins Mining Profitable
Are events M and C independent?
Does P(M  C) = P(M)P(C) ?
We know: P(M  C) = .36, P(M) = .70, P(C) = .48
But: P(M)P(C) = (.70)(.48) = .34, not .36
Hence: M and C are not independent.

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Mutual Exclusiveness and Independence
• Do not confuse the notion of mutually exclusive events with that of
independent events.
• Two events with nonzero probabilities cannot be both mutually exclusive
and independent.
• If one mutually exclusive event is known to occur, the other cannot
occur.; thus, the probability of the other event occurring is reduced to
zero (and they are therefore dependent).
• Two events that are not mutually exclusive, might or might not be
independent.

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 Bayes’ Theorem
• Often, we begin probability analysis with initial or prior probabilities.
• Then, from a sample, special report, or a product test we obtain some
additional information.
• Given this information, we calculate revised or posterior probabilities.
• Bayes’ theorem provides the means for revising the prior probabilities.

Application
Prior New Posterior
of Bayes’
Probabilities Information Probabilities
Theorem

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Bayes’ Theorem
• Example: Shipment of parts

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Prior Probabilities
• Example: Shipment parts
Let:
A1 = event that a part is from supplier 1
A2 = event that a part is from supplier 2
Using subjective judgment:
P(A1) = .65, P(A2) = .35

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New Information

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Conditional Probabilities

P(G|A1) = .98 and P(G|A2) = .95

Hence: P(B|A1) = .02 and P(B|A2) = .05

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Tree Diagram

Step 1 Step 2 Experimental Outcomes

P(G|A1) = .98 P(A1  G) =

P(A1) = .65
P(B|A1) = .02 P(A1  B) =

P(G|A2) = .95
P(A2  G) =
P(A2) = .35
P(A2  B) =
P(B|A2) = .05
1.00

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Bayes’ Theorem
• To find the posterior probability that event Ai will occur given that event B
has occurred, we apply Bayes’ theorem.
𝑃 ( 𝐴𝑖 ) 𝑃 ( 𝐵∨ 𝐴𝑖 )
𝑃 ( 𝐴𝑖|𝐵 ) =
𝑃 ( 𝐴1 ) 𝑃 ( 𝐵| 𝐴1 ) + 𝑃 ( 𝐴2 ) 𝑃 ( 𝐵| 𝐴2 ) + …+ 𝑃 ( 𝐴𝑛 ) 𝑃 ( 𝐵∨ 𝐴𝑛 )

• Bayes’ theorem is applicable when the events for which we want to

compute posterior probabilities are mutually exclusive and their union is
the entire sample space.

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Posterior Probabilities

Given that it is a bad part, we revise the prior probabilities of

obtaining it from supplier A as follows:
𝑃 ( 𝐴 1 ) 𝑃 ( 𝐵∨ 𝐴1 )
𝑃 ( 𝐴 1| 𝐵 ) =
𝑃 ( 𝐴 1 ) 𝑃 ( 𝐵| 𝐴 1 ) + 𝑃 ( 𝐴 2 ) 𝑃 ( 𝐵| 𝐴 2 )

= .4262

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Bayes’ Theorem: Tabular Approach
• Step 1
Prepare the following three columns:
Column 1 - The mutually exclusive events for which posterior probabilities
are desired.
Column 2 - The prior probabilities for the events.
Column 3 - The conditional probabilities of the new information given
each event.

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Bayes’ Theorem: Tabular Approach
• Step 1
(1) (2) (3) (4) (5)
Prior Conditional
Events Probabilities Probabilities
Ai P(Ai) P(B|Ai)
A1 .65 .02
A2 .35 .05
1.0

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Bayes’ Theorem: Tabular Approach
• Step 2
Prepare the fourth column:
Column 4
Compute the joint probabilities for each event and the new
information B by using the multiplication law.
Multiply the prior probabilities in column 2 by the corresponding
conditional probabilities in column 3. That is, P(Ai IB) = P(Ai) P(B|Ai).

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Bayes’ Theorem: Tabular Approach
• Step 2
(1) (2) (3) (4) (5)
Prior Conditional Joint
Events Probabilities Probabilities Probabilities
Ai P(Ai) P(B|Ai) P(Ai Int B)
A1 .65 .02 .0130
A2 .35 .05 .0175
1.0

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Bayes’ Theorem: Tabular Approach
• Example:
• Step 4
Prepare the fifth column:
Column 5
Compute the posterior probabilities using the basic relationship of
conditional probability.
𝑃 ( 𝐴𝑖∩ 𝐵)
𝑃 ( 𝐴𝑖|𝐵 ) =
𝑃 ( 𝐵)
The joint probabilities P(Ai I B) are in column 4 and the probability
P(B) is the sum of column 4.

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Bayes’ Theorem: Tabular Approach
• Example: L. S. Clothiers
• Step 4
(1) (2) (3) (4) (5)
Prior Conditional Joint Posterior
Events Probabilities Probabilities Probabilities Probabilities
Ai P(Ai) P(B|Ai) P(Ai Int B) P(Ai |B)
A1 .65 .02 .0130 .4262
A2 .35 .05 .0175 .5738
1.0 P(B)=.0305 1.0000

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Bayes’ Theorem: Tabular Approach
• Example:
• Step 4
(1) (2) (3) (4) (5)
Prior Conditional Joint Posterior
Events Probabilities Probabilities Probabilities Probabilities
Ai P(Ai) P(B|Ai) P(Ai I B) P(Ai |B)
A1 .
.
A2 .
1.0000
P(B) =

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