2.

0 Introduction to Probability Distribution

What is a probability distribution?

A probability distribution is a statistical function that brings description to all the possible
values and like hoods that a random variable is able to take within a given range. This given range
will be bounded between the minimum and maximum possible values. A number of factors influences
the possible value to be plotted on the probability distribution precisely. These factors include
distribution’s mean (average), standard deviation, skewness and kurtosis. Skewness is a measurement
of the distortion of symmetrical distribution or asymmetry in a data set whereby kurtosis is a
statistical measure used to describe a characteristic of a dataset.

Key properties

o A probability distribution depicts the expected outcomes of possible values for a given data-
generating process.
o Probability distributions come in many shapes with different characteristics, as defined by
the mean, standard deviation, skewness, and kurtosis.
o Investors use probability distributions to anticipate returns on assets such as stocks over time
and to hedge their risk.

Concept of random variable and their types

Random variables are variable that follow a probability distribution. There is special notation
you can use to say that a random variable follows a specific distribution:

 Random variables are usually denoted by X.

 The ~ (tilde) symbol means “follows the distribution.”
 The distribution is denoted by a capital letter (usually the first letter of the distribution’s
name), followed by brackets that contain the distribution’s parameters.

For example, the following notation means “the random variable X follows a normal distribution with
a mean of µ and a variance of σ2.
There are two types of probability distributions:

1) Discrete probability distributions

A discrete probability distribution is a probability distribution of a categorical or discrete variable.

Discrete probability distributions only include the probabilities of values that are possible.

2) Continuous probability distributions

A continuous probability distribution is the probability distribution of a continuous variable. A

continuous variable can have any value between its lowest and highest values. Therefore,
continuous probability distributions include every number in the variable’s range.

Binomial

Discrete
probability Poisson
distribution

Discrete uniform
Probability
distributions
Normal
distribution

Continous
probability Exponential
distribution

Continous
uniform

Figure 1: Types of random variables

Importance of probability distributions in statistical analysis and decision making

a) The role of probability distribution in business management

In the context of business management, a probability distribution is a statistical model that

exhibits possible outcomes of a particular event or course of action despite the statistical
likelihood of each event. For example, a company might have a probability distribution for the
change in sales given a particular marketing campaign. The values on the "tails" or the left and
right end of the distribution are much less likely to occur than those in the middle of the curve.
 b) Scenario Analysis

In doing scenario analysis, probability distribution is applied to create several, theoretically distinct
possibilities for the outcome of a particular course of action or future event. Such as, a business might
come up with three scenarios as worst-case, likely and best-case. Value from the lower end of the
probability distribution makes up the worst-case scenario while he likely scenario would contain a
value towards the middle of the distribution; And the best-case scenario would contain a value in the
upper end of the scenario.

c) Risk Evaluation

Probability distribution is a vital tool to us in evaluating risk in context such as predicting future sales.
For an examples, a company is considering to enter a new business line. They need to generate
RM500 000 in revenue in order to break even and their probability distribution tells them that there is
a 10 percent chance that revenues will be less than RM500,000, the company knows roughly what
level of risk it is facing if it decides to pursue that new business line.

Examples of commonly used probability distributions

a) Bernoulli distribution

o Is a discrete probability distribution for a Bernoulli trial

o A random experiment that has only two outcomes which is usually called as success
or failure
o For an example, the probability of getting a head (success) while flipping a coin is
0.5. The probability of “failure” is 1 – P which is also 0.5 for a coin toss. It is a
special case of the binomial distribution for n = 1. In other words, it is a binomial
distribution with a single trial.
b) Normal distribution
o Is a continuous probability distribution
o Used frequently in finance, investing, science, and engineering.
o The normal distribution is fully characterized by its mean and standard deviation,
meaning the distribution is not skewed and does exhibit kurtosis.
o Height, birth weight, reading ability, job satisfaction are just a few examples of such
variables.
 c) Poisson distribution
o Is a discrete probability distribution
o Deals with the frequency with which an event occurs within a specific interval
o Rather than probability of an event, Poisson distribution is about knowing how often
it happens in a particular period or distance
o For an example, a cricket chirps two times in 7 seconds on average. We can use the
Poisson distribution to determine the likelihood of it chirping five times in 15
seconds.
d) Exponential distribution
o Is continuous probability distribution
o It is used to model the time taken between different events.
o For example, in physics, it is often used to measure radioactive decay in engineering,
to measure the time associated with receiving a defective part on an assembly line.
o In aspect of finance, to measure the likelihood of the next default for a portfolio of
financial assets. Another common application of Exponential distributions in survival
analysis.

Research/Case Study on Normal Probability Distribution

o On the importance and the unimportance of birthweight is a journal that has been
published in International Journal of Epidemiology (2001) by Allen J Wilcox.

The research was about birthweight of infants. Birthweight is among the most accessible and most
misunderstood variable in Epidemiology. It was written that a baby’s weight at birth is strongly
related with morality risk, to a lesser intensity with developmental problems in childhood and also
risk of various diseases in the phase of adulthood.

The Epidemiology of Birthweight is analysed by utilising frequency distribution. The frequency

distribution of birthweight is strikingly Normal which means is bell-shaped with an extended lower
tail.
 Figure 1: Distribution of birthweight for 405 676 live and still births, Norway, 1992-1998

From Figure 1 above, we are able witness that the observed distribution of weights for 400 000 births.
The solid lines indicate the normal component of birthweight distribution which is addressed as
predominant distribution. The predominant distribution which is defined by its mean and standard
deviation consists of the vast of majority births. Residual distribution is the remainder of the
birthweight distribution. Residual distribution bring constitutes all births in lower tail of the curve that
falls outside the predominant distribution. From Figure 1, it is shown that among the typical
population, 2 to 5% of births are in the residual population.

o Recommended Chair and Work Surfaces Dimensions of VDT Tasks for Malaysian
Citizens (2009) is a research journal written by Darliana Mohamad.

This paper carries an objective to propose a recommended chair and work surfaces dimensions of
VDT Tasks for Malaysian Citizens appropriate chair and table dimensions with respect to the
Malaysian anthropometric data.

Table 1: Anthropometric data for overall Malaysian citizen, all units are in mm
From table 1 above, it is read that the average sitting height for Malaysian citizen are 820.55mm
while the standard deviation is 79.20 mm. Standard deviation is directly proportional with the
difference between each data and the mean value. Normal distribution is used for calculation of 5 th
and 95th percentile.
 Figure 2: Examples of calculation for sitting height

Figure 2: The Normal distribution graph

From figure above, further understanding is achieved with a basic normal distribution graph with clear
description on the 90% of distribution.

Figure 3: Normal distribution graphs with histogram for stature of Malaysian citizen

From figure above, it is seen that the distribution is quite normal. Therefor, it can be
summarised that 90 percent of the Malaysian citizen heights lies between 1473.42 mm and 1773.68
mm.