Fundamentals of Business Statistics

Introduction to Probability

Dan Mitchell

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Outline
• Probability

• Mutually Exclusive Events

• Adding Probabilities

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Probability
• We have all seen examples of probability
• What is the probability that a coin lands on heads
when flipped?
• What is the probability that I draw a King from a
shuffled deck of cards?
• What is the probability that the stock market goes
up by more than 5% over the next 12 months?

• We want to mathematically formalize probability so

we can use it to make business decisions under
uncertainty
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Probability
• Probability is a mathematical concept that describes
the likelihood of an event occurring
• It is a number between 0 and 1!

• An experiment is a repeatable procedure with a

known set of outcomes

• A sample space is the set of all possible outcomes of

an experiment

• An event is the outcome of an experiment to which a

probability
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Probability
• Those definitions are all a bit circular
• Let’s think about the example of drawing a single card
from a shuffled deck
• The sample space is the set of all cards: {AD, AH,
AC, AS, 2D, 2H, 2C, 2S, …, KD, KH, KC, KS}
• The experiment is the process of drawing a card
• An event is drawing a king or diamond
• The probability of this event occurring is 16/52
Probability
• Consider a machine that is manufactured from 3 parts
• Each of those three parts might be defective
• If 2 or more of those parts are defective then the
whole machine is defective
• Sample space: {GGG, GGD, GDG, GDD, DGG, DGD,
DDG, DDD}
• Experiment: make a machine and see if it’s defective
• Event: is it defective?
• Probability: this is a bit harder to answer – we need to
learn some more!
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Probability
• Consider an event, A (King or diamond)
• Let’s repeatedly perform an experiment, 𝑛 times
1 𝑖𝑓 𝐴 𝑜𝑐𝑐𝑢𝑟𝑠 𝑖𝑛 𝑒𝑥𝑝𝑒𝑟𝑖𝑚𝑒𝑛𝑡 𝑖
• Let 𝑎𝑖 = ቊ
0 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒
• We then define
1 𝑛
• 𝑃 𝐴 = lim σ𝑖=1 𝑎𝑖
𝑛→∞ 𝑛

• The probability of an event is the relative frequency

that event occurs if the experiment is repeated
infinitely many times
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Probability
• Of course this is a bit ridiculous…nothing has ever
happened infinitely many times
• How did we answer the question about the cards?
• Enumerate all possible outcomes
• All cards are equally likely: 1/52
• Count the cards that are king or diamond: 16

• This isn’t always possible, but we still want to

describe the probability of events

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Probability
• There are a few ways we can get “probability”
• A priori probability: The mathematical definition from
before
• Empirical probability: Use data to measure relative
frequency, with a finite 𝑛
• Expert probability: Ask an expert in the field what they
believe the probability is

• With this in mind, let’s talk about some properties of

events and probability

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Events
• Consider two events: A, B
• These two events are said to be mutually exclusive if
the probability of them both occurring is 0

• Let A be drawing a king, B is drawing a queen

• If you draw 1 card it cannot be a king and a queen!

• Suppose A is drawing a king and B is drawing a

diamond
• Are these events mutually exclusive?
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Events
• The way we write two events both occurring is with
the intersect notation: ∩
• Two events are mutually exclusive if
• 𝑃 𝐴∩𝐵 =0

• The way we write either of two events occurring is

with the union notation: ∪

• What is 𝑃 𝐴 ∪ 𝐵 ?

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Events
• If A is King and B is diamond
• P(A) = 4/52
• P(B) = 13/52
• P(A) + P(B) = 17/52 ?
• But we already know the true probability is 16/52

• The king of diamonds is in both A and B

• We counted it twice!

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Events
• The probability of a union is
• 𝑃 𝐴 ∪ 𝐵 = 𝑃 𝐴 + 𝑃 𝐵 − 𝑃(𝐴 ∩ 𝐵)

• In the card example 𝐴 ∩ 𝐵 is when a card is both a

king and a diamond
• There is exactly 1 of those, with probability 1/52
• 𝑃 𝐴Proprietary
∪ 𝐵 content.
= 4/52 + 13/52 - 1/52 = 16/52
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Events
• If two events are mutually exclusive: 𝑃 𝐴 ∩ 𝐵 = 0
• Then 𝑃 𝐴 ∪ 𝐵 = 𝑃 𝐴 + 𝑃 𝐵
• What is the probability that a card is a king or queen?
• We already know these are mutually exclusive!
• 4/52 + 4/52 = 8/52

• What is 𝑃 𝐴 ∩ 𝐵 in general?

• We need to learn some more before we can answer

this
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