Theory of Probability

1. Probability field

Theory of probability is a branch of mathematics developed for modeling of random

phenomena (as the most economic processes are). The basic object approached by theory of
probability is called a random (chance) experiment. The main features that define this concept
are:
➢ a random experiment can be, at least conceptually, repeated arbitrary often under identical
conditions;
➢ the outcome of a random experiment belongs to a fixed, known set of possibilities;
➢ the outcome of a random experiment is unpredictable (random).
The entire set of possible outcomes attached to a random experiment is called the universal
set or sample space and is denoted by . A single instance of performing the experiment is a
called trial.

Examples
A) A coin is flipped - a random experiment. The outcomes are H (heads) and T (tails).
Therefore the sample space is ={H, T}.
B) A coin is flipped three times in succession – a random experiment. The outcomes are all
triplets we can obtain with the elements H and T, so the sample space is ={HHH, HHT,
HTH, HTT, THH, THT, TTH, TTT}.
C) A die labeled with numbers from 1 to 6 is cast – a random experiment. The outcomes are
k, k= 1, 6 , where k means “the obtaining of number k”, k= 1, 6 . In this case the sample space

is ={1, 2, 3, 4, 5, 6}.

1.1 Events, operations with events.

Definition
A collection of outcomes of a random experiment, that is a subset of , is called an event.
An event A occurs whenever any outcome in A occurs.

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Examples
1) For the B) experiment mentioned before one can define the events A-“the coin first
come up heads” that means the subset A={HHH, HHT, HTH, HTT} or B-“the same
face shows in the first and the second tosses” with the attached set B={HHH, HHT,
TTT, TTH}.
2) For the C) experiment defined before we can consider the event A- “the obtained
number is odd” that means A={1, 3, 5}.

Definitions
➢ The empty set  is called the impossible event.
➢ The universal set  is called the certain event (it occurs at every trial).
➢ Events with a single outcome are called elementary or atomic events. Events with more
than one outcome are composite events.
For instance, in example A) we considered before, there are only four events: , {H}, {T}, .
Next we define the operations with events on the set theory basis.
Complementation
If AP() (power set of ) then the complement event of A, denoted A (or A’ or CA) is the

event “A has not occurred” that means in set theory A ={x xA}.
Intersection
If A, BP() two events, then the intersection AB is the event “Both A and B occurred”
and we write in set theory AB={x xA and xB}. If two events A and B have no
common outcomes (AB=  ) then A and B are said to be mutually exclusive.
Union
The union of events A and B is the event “Either A or B or both occurred” and we write
AB={x xA or xB}.

Properties
1) A(BC)=(AB)C, A(BC)=(AB)C (associativity).
2) AB= BA, AB=BA (commutativity)
3) A(BC)= (AB) (AC), A (BC)= (AB)  (AC) (distributivity).

4) A  B = A  B , A  B = A  B (De Morgan’s rules).

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1.2 Field of events. Axioms of probability. Properties.
Classical probability definition
When the universal set  attached to a chance experiment is finite we can define the
probability of an arbitrary event A  as follows (classical definition):
1
➢ if N is the number of elements in  then the probability of each atomic event is ;
N
M
➢ the probability of A, denoted P(A), equals where M is the number of elements in A, so
N
A number of favourable outcomes
P(A)= = .
 total number of outcomes

Definition
Let  a nonempty set. The set KP() is a field iff
1) AK we have A K;
2) A, BK we have ABK.
The pair (, K) is called field of events.
Properties
Consider KP() a field, then: 1) K, K.
n
2) If {Ai}i=1,2,…,nK then A i  K.
i =1

3) If A, BK then AB and A\BK.

Definition (probability)
Consider (, K) a field of events. A probability on this field is a function P:K→R satisfying
the following axioms:
1) P(A)0 AK;
2) P()=1;
3) A1, A2K with A1A2= then P(A1A2)=P(A1)+ P(A2).
The structure (, K, P) is called a (finite) probability field.
Remark
It’s obvious that the axiom 3 can be extended to:
n n
{Ai}i=1,2,…,nK such as AiAj=, ij, i, j= 1, n we have P( A i )=  P(A i ) .
i =1 i =1

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Properties
Consider (, K, P) a probability field. Then
1) P(A\B)=P(A)-P(AB), A, B K.
2) If A, B K with BA, then P(A\B)=P(A)-P(B).

3) P( A )=1-P(A), A K.
4) P()=0.
5) P(A)[0, 1], A K.
6) P(AB)=P(A)+P(B)- P(AB), A, B K.