Probability - Student Lecture

5123 Business Statistics
Assessing Risk: Probability

Assessing Risk
Every day you are making judgments, perhaps
subconsciously, based on past data or information which
provides estimates of the chances of events occurring.
In this unit we are placing such data-based decision

making in a business context.
2
Case Study Product Shopping
A market research company performs a survey on retail
outlets of a certain pharmaceutical product, in which
consumers in the city and suburbs are asked to identify
the type of store where they bought the product.
This information will help suppliers of the product with
their delivery logistics and retailers with their advertising.
The research company asked a random sample of 205
customers and summarised their location and
the type of store at which they purchased the product in
the following table (contingency table).
3
Location
Outlet City Suburbs Total
Supermarket 39 46 85
Pharmacy 47 73 120
Total 86 119 205
Some of the questions market research company hopes to

answer are:
What proportion of customers buy the product at a supermarket?
What proportion of customers in the City buy the product at a
supermarket?
Are customers in the City more likely to buy the product at a
supermarket?
Does being in the City influence whether a customer buys the
product at a supermarket?
4
Another way to present the information is with a
Venn diagram.
A = the customer buys the product at a supermarket
B = the customer is located in the City
A B
46 39 47
73
5
The raw values in the contingency table or Venn diagram
can be converted into probabilities.
Contingency Table Joint Probability Table
Location Location
City Suburbs City Suburbs

Outlet Total Outlet Total
Super- Super-
39 46 85 0.19 0.22 0.41
market market
Pharmacy 47 73 120 Pharmacy 0.23 0.36 0.59
Total 86 119 205 Total 0.42 0.58 1
A B A B
46 39 47 0.22 0.19 0.23
73 0.36
6
Key messages: this week you will
learn
What we mean by the probability of an event and
its associated notation
The range of possible values for probabilities and
interpretations
What we mean by the complement of an event
The different types of probabilities and how they
are evaluated
What we mean by mutually exclusive events and
how to identify them
What we mean by independent events and how to
identify them
7
The probability of an event: P(event)
Business Decision-Making
Management needs to decide upon whether to allocate
machinery to an open building site or an undercover
site.
What is the chance (probability) it will rain tomorrow?
The event would be rain tomorrow
P(rain tomorrow)
In notations form
Let A = rain tomorrow
Then P(A)
8
Management of Aldi group is interested in potential value
in opening a new store in the region.
What is the chance (probability) of a local consumer spending
more than $175 per week on groceries?
The event is consumer spends more than $175 per week
on groceries
P(consumer spends more than $175 per week on groceries)
In notations form
Let B = consumer spends more than $175 per week on groceries
Then P(B)
9
How do we determine such probabilities?
Sometimes we do so in theory, other times we obtain data
and consider proportions.
E.g., out of 88 days where we saw these weather

conditions it rained the next day 22 times.suggests
chance is 25%, or P(A)=25%=0.25.
E.g., out of a random sample of 1000 households, 600

indicated they spend above $175 .suggests chance is
60%, or P(B)=60%=0.6.
However, if we sampled another 1000 households, would we get
the same result?
10
learn
its associated notation.
interpretations
are evaluated
11
Range of probabilities
If an event has no chance of occurring, then P(event)=0%
i.e., the probability of the event is 0%, or 0.
If an event definitely will occur, then P(event)=100%

i.e., the probability of the event is 100%, or 1.
0% to 100% is the same as 0 to 1.

Hence probabilities range between 0 and 1.
Consider something that has a 50% chance of occurring, this is the
same as 0.5 or .
You will NEVER have a probability outside this range!

12
Interpretation in practice
Often it is best to quote the fact.
E.g., if 10% then this means a 1 in 10 chance of the event

occurring.
You can then interpret in the context of the Business

application whether 10% is too high or acceptable.
P(defect)=10%, or P(computer crashes each

day)=10%...likely too high!
13
learn
interpretations
are evaluated
identify them
14
Complement of an event
Management needs to decide upon whether to allocate
machinery to an open building site or an undercover site.
What is the chance (probability) it will rain tomorrow?
The event would be rain tomorrow. The complement would
be no rain tomorrow.
P(rain tomorrow), P(no rain tomorrow)
In notations form
Let A = rain tomorrow, AC = no rain tomorrow
Then P(A) , P(AC)
P(AC) = 1 P(A)
15
Complement of an event (ctd)
Management of Aldi group is interested in potential value in opening
a new store in the region.
What is the chance (probability) of a local consumer spending more than
$175 per week on groceries?
The event is consumer spends more than $175 per week on
groceries. The complement is consumer does not spend more than
$175 per week.
P(consumer spends more than $175 per week on groceries), P(consumer
does not spend more than $175 per week on groceries)
In notations form
Let B = consumer spends more than $175 per week on groceries, BC =
consumer does not spend more than $175 per week on groceries
Then P(B) , P(BC)
P(BC) = 1 P(B) 16
learn
interpretations
are evaluated
identify them
17
Types of probabilities
Marginal
Probability of one characteristic.
E.g. Customers who are located in the City.
Joint
Probability of two or more characteristics.
E.g. Customers who are located in the City and buy
the product at a supermarket.
Conditional
Probability of a characteristic given another one.
E.g. Among customers located in the City, those who
buy the product at a supermarket.
18
Calculating marginal probabilities
Lecture Example 1: Location
A = the customer buys the
City Suburbs
product at a supermarket Outlet Total
Super-
Find P(A) market
0.19 0.22 0.41
Pharmacy 0.23 0.36 0.59
P(A) = 0.19+0.22 = 0.41 Total 0.42 0.58 1
Lecture Exercise 1:
B = the customer is in the
City
Find P(B)
19
Calculating marginal probabilities
Lecture Exercise 1 Location
(Solution): City Suburbs

Outlet Total
B = the customer is in Super-
0.19 0.22 0.41
the City market
Find P(B) Pharmacy 0.23 0.36 0.59
Total 0.42 0.58 1
20
Calculating joint probabilities
A = the customer buys the
City Suburbs
B = the customer is located in Super-

0.19 0.22 0.41
market
the City
Find P ( A B ) Pharmacy 0.23 0.36 0.59
Total 0.42 0.58 1
A B = the customer buys

the product at a supermarket
and customer is located in the
City
A and B
P ( A B ) 0.19
21
Calculating joint probabilities
Lecture Example 2 (ctd): Location
A = the customer buys the product at a
Amount
supermarket City Suburbs
spent Total
Super-
B = the customer is located in the City 0.19 0.22 0.41
market
Find P( A B ) Pharmacy 0.23 0.36 0.59
Total 0.42 0.58 1

A B
= the customer buys the product
at a supermarket or the customer is
located in the City(or both)
A or B
P( A B ) P( A) P( B ) P( A B )

0.41 0.42 0.19 0.64
22
Calculating a marginal and a joint probability
A = the customer buys the City Suburbs

c
A = not A = the customer Super-
market
0.19 0.22
0.41
buys the product at a pharmacy 0.59

Pharmacy 0.23 0.36
Total 0.42 0.58 1

B = customer is located in the
City
c AC B C
B = not B = the customer is = the customer buys the
located in the suburbs product at a pharmacy and the
customer is located in the suburbs.
P ( AC B C )
Find
Not A and Not B
P ( AC B C ) 0.36
23
Calculating a marginal and a joint probability
Lecture Example 3 (ctd): Location
A = the customer buys the product
at a supermarket Outlet
City Suburbs
Total
Ac Super
0.19 0.22 0.41
= not A = the customer buys -market
the product at a pharmacy
Pharmacy 0.23 0.36 0.59
B = customer is located in the City Total 0.42 0.58 1
Bc
AC B C
= not B = the customer is = the customer buys the product
located in the
C suburbs
at a pharmacy or customer is located in
P( A B ) C
the suburbs (or both)
Not
P B
( AAC or Not
C
)B
Find P ( AC ) P ( B C ) P ( AC B C )
0.59 0.58 0.36 0.81
24
Conditional Probability
Suppose we have two events, denoted by A and B.
The probability that event A will occur, given that we
know event B has occurred, is called a conditional
probability.

The notation is P A B .
It means Probability of A given B .
In mathematical terms:
P( A B)
P A B
P( B )
25
Calculating conditional probabilities
Suppose we know that a
City Suburbs
customer is in the City. What is Outlet Total
the probability that they buy the Super
0.19 0.22 0.41
-market
Pharmacy 0.23 0.36 0.59
A = the customer buys the Total 0.42 0.58 1

product at a supermarket
City
P( A B) 0.19
P A B 0.45
P( B ) 0.42
26
Given that a customer buys the

City Suburbs
product at a supermarket, what is Outlet Total
the probability that they are in Super
0.19 0.22 0.41
the City? -market
Pharmacy
0.23 0.36 0.59
A = the customer buys the Total 0.42 0.58 1

product at a supermarket
B = the customer is in the City
P ( B A) 0.19
P B A 0.46
P ( A) 0.41
27
Lecture Exercise 2: Location
Suppose we know that a
City Suburbs
customer is in the City. What is Outlet Total
the probability that they buy the Super
0.19 0.22 0.41
-market
product at a pharmacy?
Pharmacy 0.23 0.36 0.59
C = the customer buys the Total 0.42 0.58 1

product at a pharmacy
City
28

Outlet Total
Suppose we know that a customer
is in the City. What is the Super
0.19 0.22 0.41
-market
probability that they buy the
product at a pharmacy? Pharmacy 0.23 0.36 0.59
Total 0.42 0.58 1

C = the customer buys the
B = customer is located in the City
29
Lecture Exercise 3: Location
Given that a customer buys the
City Suburbs
product at a pharmacy, what is Outlet Total
the probability that they are in Super
0.19 0.22 0.41
-market
the City?
Pharmacy
0.23 0.36 0.59
C = the customer buys the Total 0.42 0.58 1

30

Outlet Total
Given that a customer buys
Super
the product at a pharmacy, -market
0.19 0.22 0.41
what is the probability that
Pharmacy
they are in the City? 0.23 0.36 0.59
Total 0.42 0.58 1

C = the customer buys the
31
learn
interpretations
are evaluated
identify them
32
Mutually Exclusive Events
Events A and B are mutually exclusive if they do
not occur simultaneously.
P( A B ) 0
Lecture Example 6: Product Shopping
Is the event the customer buys the product from a
supermarket mutually exclusive from that of the
customer being in City?
A = the customer buys the product from a supermarket
B = customer is in City
From Lecture Example 2: P ( A B ) 0.19 0
Answer to the question is NO !

33
learn
interpretations
are evaluated
identify them
34
Independent Events
Events A and B are independent if the occurrence
of one does not depend on the other event
occurring.
P A B P ( A) Not a formula for
P B A P (B ) finding P(A B) !
P A B P ( A) P ( B )
Events that are not independent are termed

dependent.
35
Independent Events (continued)
Lecture Example 7: Product shopping
Is the event of a customer buying the product at a
supermarket independent from that of them being in the City?
P A B 0.45
From Lecture Example 4:
From Lecture Example 1:
P A 0.41

P A B P ( A)
Answer to the
question is NO !
From Lecture Example 5: P B A 0.46
From Lecture Exercise 1: P B 0.42

P B A P (B )
36
Independent Events (continued)
Lecture Example 7 (ctd): Product shopping
Is the event of a customer buying the product at a
supermarket independent from that of them being in the
City?
From Lecture Example 2: P ( A B ) 0.19

P ( A) P ( B ) 0.41 0.42 0.17 Answer to the
P ( A B ) P ( A) P ( B ) question is NO !
37
learn
its associated notation
interpretations
The different types of probabilities
How the different types of probabilities are
evaluated
identify them 38
Answers
Some of the questions market research company hopes
to answer are:
What proportion of customers buy the product at a
supermarket?
From Lecture Example 1: P(supermarket) = 0.41
What proportion of customers in the City buy the product at a

supermarket?
From Lecture Example 4: P(supermarket city) = 0.45
39
Answers
Some of the questions market research company hopes
to answer are:
Are customers in the City more likely to buy the product at a
supermarket?
From Lecture Example 4: P(supermarket city) = 0.45

From Lecture Exercise 2: P(pharmacy city) = 0.55
Answer to the question is NO !
Does being in the City influence whether a customer buys the

See Lecture Example 7

Answer to the question is YES !
40
Further Reading
Basic Business Statistics 4, by Berenson et al.

Chapter 4
Please note:
The book is a reference only; its the lecture content
which dictates what you read in the book.
41
Next Week
Assessing Risk and the Normal distribution
42

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5123 Business Statistics

Assessing Risk: Probability

In this unit we are placing such data-based decision

Some of the questions market research company hopes to

City Suburbs City Suburbs

Pharmacy 47 73 120 Pharmacy 0.23 0.36 0.59

Total 86 119 205 Total 0.42 0.58 1

E.g., out of 88 days where we saw these weather

E.g., out of a random sample of 1000 households, 600

If an event definitely will occur, then P(event)=100%

0% to 100% is the same as 0 to 1.

You will NEVER have a probability outside this range!

E.g., if 10% then this means a 1 in 10 chance of the event

You can then interpret in the context of the Business

P(defect)=10%, or P(computer crashes each

Pharmacy 0.23 0.36 0.59

P(A) = 0.19+0.22 = 0.41 Total 0.42 0.58 1

(Solution): City Suburbs

Find P(B) Pharmacy 0.23 0.36 0.59

Total 0.42 0.58 1

B = the customer is located in Super-

Total 0.42 0.58 1

A B = the customer buys

Find P( A B ) Pharmacy 0.23 0.36 0.59

Total 0.42 0.58 1

A = the customer buys the City Suburbs

buys the product at a pharmacy 0.59

Total 0.42 0.58 1

B = customer is located in the City Total 0.42 0.58 1

A = the customer buys the Total 0.42 0.58 1

Given that a customer buys the

A = the customer buys the Total 0.42 0.58 1

C = the customer buys the Total 0.42 0.58 1

(Solution): City Suburbs

Total 0.42 0.58 1

C = the customer buys the Total 0.42 0.58 1

(Solution): City Suburbs

Total 0.42 0.58 1

Answer to the question is NO !

Events that are not independent are termed

From Lecture Example 2: P ( A B ) 0.19

What proportion of customers in the City buy the product at a

From Lecture Example 4: P(supermarket city) = 0.45

Does being in the City influence whether a customer buys the

See Lecture Example 7

Basic Business Statistics 4, by Berenson et al.

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