5.

A Survey of Probability Concepts

Introduction
- Statistical inference or inferential statistics
- Conclusions about a population based on a sample taken from that population.
- Probability theory / science of uncertainty
o Analyze the risk and minimize to gamble inherent

What Is a Probability?
- Probability:
o A value between zero and once, inclusive, describing the relative possibility (chance or
likelihood) a event occurs.
- Experiment
o A process that leads to the occurrence of one and only one of several possible results
- Outcome
o Outcome is a particular result of an experiment.
- Event
o When one or more of the experiment’s outcomes are observed we call this an event.
o A collection of one or more outcomes of an experiment.

Approaches to Assigning Probabilities

- There are three ways to assign a probability: classical, empirical, and subjective
- Classical Probability
o Based on the assumptions that the outcomes of an experiment are equally likely

- Mutually Exclusive
o The occurrence of one event means that none of the other events can occur at the same
time.
- Collectively exhaustive
o At least one of the events must occur when an experiment is conducted.
o If a set of events is collectively exhaustive and the events are mutually exclusive, the
sum of the probabilities is 1.
- Empirical Probability
o Empirical or relative frequency is based on the number of times an event occurs as a
proportion of a known number of trials

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 o Empirical Probability: The probability of an event happening is the fraction of the time
similar events happened in the past.

o Bases on the law of large numbers

 Over a large number of trials, the empirical probability of an event will approach
its true probability


Subjective Probability
- If there is little or no experience or information on which to base a probability, it is estimated
subjectively.
- Subjective concept of probability: The likelihood (probability) of a particular event happening
that is assigned by an individual based on whatever information is available.

Rules of Addition for Computing Probabilities

- Special Rule of Addition
o Events must be mutually exclusive
o P(A or B) = P(A) = P(B)
- Complement Rule
o P(A) = 1 – Contrary of P(A)
o Is used to determine the probability of an event occurring by subtracting the probability
of the event not occurring from 1.
o Event “A” and event “Contrary of A” are mutually exclusive and collectively exhaustive
o P (A) = Contrary of P(A) = 1
- The General Rule of Addition (joint probability)
o Joint Probability is a probability that measures the likelihood two or more events will
happen concurrently.

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Rules of Multiplication to Calculate Probability
- Special Rule of Multiplication
o Requires that two events A and B are independent.
o Independence:
 The occurrence of one event has no effect on the probability of the occurrence
of another event.
o Special Rule of Multiplication
 P(A and B) = P(A) * P(B
- General Rule of Multiplication
o Requires that two events A and B are dependent.
o Conditional Probability
 The probability of a particular event occurring, given that another event has
occurred

Contingency Tables
- A table used to classify sample observations according to two or ore identifiable categories or
classes
- Cross tabulation that simultaneously summarizes two variables of interest and their
relationship. The level of measurement can be nominal.
- Tree Diagrams
o Is a visual that is helpful in organizing and calculating probabilities
o It can visualize a contingency table’s content

Bayes’ Theorem

- Events are mutually exclusive and collectively exhaustive

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 - Prior Priority
o The initial probability based on the present level of information
- Posterior probability
o A revised probability based on additional information
- Look examples for calculation p. 156

Principles of Counting
- To facilitate counting there are thee formulars
- Multiplication Formula
o If there are m ways of doing one thing and n ways of doing another thing, there are m x
n ways of doing both
o Total number of arrangements = (m)(n)
- The Permutation Formula
o Works when there is a single group of objects
o Permutation
 Any arrangement of r objects selected from a single group of n possible objects.
 In Excel: =PERMUT(n, r)

- The Combination Formula

o If the order in not important, any selection is called a combination
o In Excel: =COMBIN(n, r)
o Number of combinations is always less than the number of permutations.

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