Business Statistics

Random Variables and Probabilities

Ikram-E-Khuda
 The Big Picture
Inputs Random System Mutually
performing Exclusive
Random Outputs
Experiment

Outputs comprise the sample space and each output has its probability of occurrence

The real value assigned to each output is the random variable

Statistics use the information of probability to help us understand the random systems and ultimately develop the inference
 Concept of a Random Variable
A function whose value is a real number determined by each element
in the sample space is called a random variable
 Concept of a Random Variable
Random Variable Types
Discrete
Continuous
Concept of a Random Variable
Concept of a Random Variable
Concept of a Random Variable
 Measurement Scales of Sampling
• Measurement scales are used to categorize and/or quantify variables
which are the outcomes of a random experiment out of sampling
process.

• Four scales of measurement that are commonly used in statistical

analysis:
• nominal
• ordinal
• Interval
• ratio scales.
 Properties of Measurement Scales
Each scale of measurement satisfies one or more of the following properties of
measurement.
• Identity. Each value on the measurement scale has a unique meaning.

• Magnitude. Values on the measurement scale have an ordered relationship to one

another.
• That is, some values are larger and some are smaller.

• Equal intervals. Scale units along the scale are equal to one another. This means, for
example, that the difference between 1 and 2 would be equal to the difference between
19 and 20.

• A minimum value of zero. The scale has a true zero point, below which no values exist.
 Nominal Scale of Measurement
The nominal scale of measurement only satisfies the identity property
of measurement.
Examples
• Gender
• Religion
• Political affiliation
• Color
 Ordinal Scale of Measurement
The ordinal scale has the property of both identity and magnitude.
An ordinal variable is a categorical variable for which the possible values are ordered

Example
• Rank can be ordered as 1st, 2nd 3rd etc (in a race)
• However, we cannot tell from this ordinal scale whether it was a close race or whether the
winner won by a mile !

• Educational level might be ordered as

1: Elementary school education
2: High school graduate
3: Some college
4: College graduate
5: Graduate degree
 Interval Scale of Measurement
• The interval scale of measurement has the properties of
• Identity
• Magnitude
• Equal intervals.

Example
• Temperature
• Any temperature scale is made up of equal temperature units, so that the difference
between 40 and 50 degrees is equal to the difference between 50 and 60 degrees (for
example).
• With an interval scale, you know not only whether different values are bigger or smaller,
you also know how much bigger or smaller they are.
• Absolute zero is not defined!!
 Ratio Scale of Measurement
The ratio scale of measurement satisfies all four of the properties of
measurement: identity, magnitude, equal intervals, and a minimum value of
zero.
Example
• Distance
• Length
• Height
• Width

• Area
• Age
• Cost price
• Selling price
 Summary of Different Variable Types
Data or Random Variable
• Qualitative
• Discrete (Integer Numbers)
• Nominal
• Ordinal
• Quantitative
• Continuous (Real Numbers)
• Finite set: Grouped or Ungrouped type
• Ordinal
• Scaled
• Zero point defined
• Zero point undefined
• Infinite set (intervals)
 Random Variable and Events
• An event is an outcome or a union of outcomes, when the outcomes
are the occurrences over which you can assign probabilities (or
measures).

• A random variable is a variable whose domain is the set of

basic events, and whose range (outcome) could be numerical or
categorical.
 Descriptive Statistics vs. Statistical Inference
• Descriptive statistics and use of SPSS
• Gives first hand knowledge about the data
• Presenting, organizing and summarizing the data
• Probability calculations
• By frequency distribution tables
• Graphing the data
• Measures of central tendency
• Measures of Dispersion
• Five number summary
• Measures of shapes

• Inferential statistics makes inferences/ conclusions and predictions about a

population based on a sample of data taken from the population in
question.
 Population and Sampling
Population and sample are two basic concepts of statistics.
• Population
• Population is the collection of all individuals or items under consideration in a statistical study.
• Sample
• Sample is that part of the population from which information is collected.
• Sampling
• Sampling is the process by which inference is made to the whole by examining a part.
• With a single grain of rice, we can test if all the rice in the pot has boiled;
• from a cup of tea, a tea-taster determines the quality of the brand of tea; and
• a sample of moon rocks provides scientists with information on the origin of the moon.
• This process of testing some data based on a small sample is called sampling

Sampling Types
• Probability Sampling
• Non-probability sampling

• The population always represents the target of an investigation. We learn about the population by
sampling from the collection.
Population and Sampling
 The Statistical Inference Process
• Graph your data (probability distributions)
• Look the shape!
• Normal, skewed and kurtosis

• Estimations (Estimating the Population parameter in the Sample)

• Point Estimation
• It gives a particular value as an estimate of the population parameter
• Mean/ weighted mean, median, mode, quartiles, percentiles, range, IQR etc

• Interval Estimation
• It gives a range of values which is likely to contain the population parameter.
• This interval is called a confidence interval
• This procedure also tells that how likely the interval is to contain the actual parameter
• That value is called confidence level
• Usually α=1-confidence level. This implies that confidence level=1-α
• A confidence interval is a random interval

• Inference
• Hypothesis testing
• One tailed and two tailed tests
• Type 1 and Type 2 errors
• Drawing conclusion and predictions
 Probability Calculations
• Basic probability of one event

• Probability of two events occurring simultaneously

• Mutually exclusive case

• Probability of two events occurring one after the other

• Conditional probabilities and decision trees
• Bayes theorem
 Probability Review

• Probability of an event A is symbolized by P(A) and 0 ≤ P(A) ≤ 1.

Probability Formula 1
𝑇𝑜𝑡𝑎𝑙 𝑛𝑜. 𝑜𝑓 𝑓𝑎𝑣𝑜𝑢𝑟𝑎𝑏𝑙𝑒 𝑐𝑎𝑠𝑒𝑠
𝑃 𝐴 =
𝑇𝑜𝑡𝑎𝑙 𝑠𝑎𝑚𝑝𝑙𝑒 𝑠𝑝𝑎𝑐𝑒

Probability Formula 2
𝑚 = 𝑁𝑜. 𝑜𝑓 𝑡𝑖𝑚𝑒 𝑒𝑣𝑒𝑛𝑡 𝐴 𝑜𝑐𝑐𝑢𝑟𝑠
𝑃 𝐴 = lim
𝑛→∞ 𝑛 = 𝑁𝑜. 𝑜𝑓 𝑟𝑒𝑝𝑒𝑡𝑖𝑡𝑖𝑜𝑛𝑠 𝑜𝑓 𝑟𝑒𝑛𝑑𝑜𝑚 𝑒𝑥𝑝𝑒𝑟𝑖𝑚𝑒𝑛𝑡

• Sum of the probabilities of all mutually exclusive events is always equal to 1.

 Other Rules of Probability
Rules of Sum and Rules of Product
 Some Examples with Cases
• Out of a sample of 200 items, 20 are found to be defective. Find the probability
that an item chosen at random from the sample is not defective. (Ans: 90%)

• Four cards are drawn at random from a well shuffled pack of 52 cards. Find the
probability that:
• Two cards are diamonds and two are hearts ? (Ans: 2.247%)
• All the four cards are hearts and one of them is Jack ? (Ans: 0.000813)

• If we draw a card from a well shuffled pack of 52 cards, what is the probability
that the card is either an ace or a king? (Ans: 2/13)

• If we draw a card from a well shuffled pack of 52 cards, what is the probability
that the card is either an spade or an ace? (Ans: 4/13)
Other Probability Rules
Rule of Total Probability
Some Examples with Cases
 Some Examples with Cases
A box 'A' contains 2 white and 4 black balls. Another box 'B' contains 5
white and 7 black balls. A ball is transferred from box 'A' to box 'B' and
a ball is drawn at random from box 'B'. What is the probability that it
will be black? (Ans: 23/39)
Other Probability Rules
Bayes Theorem
Some Examples with Cases
Some Examples with Cases
 Some Examples with Cases
The Quality Control Manager uses some diagnostic testing procedure to find the existence of defects in the
produced items in a certain factor. Positive result from the diagnostic test shows that the test has detected the
defect in the item under test and a negative test result shows that the test has not been able to detect the defect in
an item under test. The testing procedure can have errors in their results. The testing procedure has a
probability of 0.95 of giving a positive result when applied to an item actually having the defect, and a
probability of 0.1of giving a positive result when applied to an item which is actually not defected. It is
estimated that 0.5 % of the population of produced items are defected.
Suppose that the test is now administered on an item randomly taken from the population of produced items.
Answer the following questions:
a) What is the probability of getting a positive test result?
b) If the test result is positive the what is the probability the item under test was actually defected?