MGMT 322

Lecture Notes
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 CHAPTER 1
Probability and
Fundamental
Concepts
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A Review of Probability
Theory
A. PROBABILITY
• Probability is the chance or likelihood of something occurring
(happening).

• We express probabilities either as fractions or as decimals;

E.g.: P (H) = 9/10 (as a fraction)
or
P (H) = 0.9 (as a decimal)

Note: The probabilities should neither be < 0, nor >1.

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B. EVENT

• An event is defined as either one or more than one of possible

outcomes of doing something or an activity.

• Example
ACTIVITY: Inflationary process in Turkey next year
Events: A: Annual inflation in Turkey next year is exactly 10%
B: Annual inflation in Turkey next year is less than 8%
C: Annual inflation in Turkey next year is either 5% or 7%

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C. EXPERIMENT

• The experiment is the activity that generates events.

• Example: Tossing a coin twice.

D. SAMPLE SPACE
• The sample space of an experiment is the list of all possible
outcomes of that experiment. And it is symbolized by S

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• Example
Experiment: Tossing a coin twice.
Sample Space: S = {HH, TT, HT, TH}
Events:
A: Getting 2heads ( Notice that this corresponds to only one of
the possible outcomes listed in the sample space which is HH)
B: Getting at least one tail ( in this case any one of these 3
possible outcomes given by can give us event B , TT, HT, TH)
C: Getting one head and one tail
Any one of these 2 possible outcomes( HT, TH) can give us event C

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E. MUTUALLY EXCLUSIVE EVENTS
• Mutually exclusive events are those events which can not take
place together (at the same time ) as a result of an
experiment.

• In other words they can take place only one at a time as a

result of a given experiment

F. NON – MUTUALLY EXCUSIVE EVENTS

• Are those events which can happen together at the same
time as a result of an experiment.

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• Example 1
Experiment: Tossing a coin twice
Events: X: Getting two Heads: (HH)
Y: Getting two Heads or two Tails: (HH or TT)
Z: Getting one Head and one Tail (HT or TH)

X and Y are non - mutually exclusive but X and Z are mutually

exclusive.

• Example 2
Experiment: Randomly selecting a student in this class.
Events: A: Selected student is 21 years old.
B: Selected student is male
C: Selected student is female
D: Selected student is 22 years old. 8
Events A and B are non-mutually exclusive because they can
happen together at the same time.

Events A and D are mutually exclusive because they can not

happen together at the same time.

Events A and C are non-mutually exclusive because they can

happen together at the same time.

Events B and C are mutually exclusive because they can not

happen together at the same time.

• The crucial question we should ask in determining whether a

given group of events are mutually exclusive or not is: Can two 9
or more of these events occur at the same time? If the
answer is yes, the events are not mutually exclusive.
Alternative Approaches in
Probability Theory
3 alternative approaches or methods that can be used to
estimate the probabilities in all branches of science including
management, economics, engineering, pure sciences or in the
real world in terms business, politics or personal life:

1. Classical Approach
2. Relative Frequency Approach
3. Subjective Approach

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1. CLASSICAL APPROACH
# of outcomes favorable to the occurrence of event “A”
P(A) =
Total # of possible outcomes

• Example 1
Experiment: Randomly selecting a student in a class of 40
students 10 of whom are females.

Events: A: Selecting a female student.

B: Selecting a male student.

The total number of students is 40

P (A) = 10/40 11

P (B) = 30/40
2. RELATIVE FREQUENCY APPROACH
• The main logic of this approach is based on using past data (if
available) to obtain the relative frequency of occurrence of the same
event ( or a similar event) in the past.

• And then using this past relative frequency of occurrence as an

estimate for the probability of occurrence of the given event in the
future.

• Examples
Experiment Selecting a student randomly in this class.
Event: A: This student gets “A” from MGMT 322 at the end of this
semester.

I can look at my records from last 2 semesters and find out the relative
frequency of grade A in MGMT322 class. Suppose that Past Data (for
the last 2 semesters) have shown that 20% of all students who have 12
taken MGMT 322 in the past 2 semesters got “A”. Then in that case;
P (A) = 0.20
Experiment: Istanbul Stock Market Trading Activity on any
randomly selected Monday.

Event : B: Istanbul Stock Market Index rises on that day.

Using Relative Frequency Approach we can estimate the

probability of occurrence of event B by finding out the relative
frequency of the same event in the past. Suppose that when we
check out the past 10 years of data about the behavior of
Istanbul Stock Market Index on Mondays we find out that 54% of
all the past Mondays (in the last 10 years) INDEX has increased
and in the remaining 46% of the time it has fallen. Using these
past relative frequencies we can state the following estimate for
P(B),

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P(B) = 0.54
3. SUBJECTIVE APPROACH
• This approach (or method) is actually the approach that many
of us (including you dear students) both in personal and
business life use without realizing that it is as scientific as the
first 2 especially when the first 2 approaches can not be used.

• The main logic of this approach is to estimate the probability

of occurrence of an event by utilizing your expertise,
information education, experience, emotions, feelings,
intuition and etc. in a totally subjective way. That’s why this
approach is called SUBJECTIVE APPROACH.

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• Example
Event: A: Turkish Lira loses value against Dollar tomorrow.

My personal (subjective) estimate for P(A) is 60%.

I have come up with this estimate using all my expertise,
education in macroeconomics, past experience together with
the information that I got on TV this morning in terms of all the
current developments in currency markets and politics of Turkey
and Global economy.

But another financial analyst in Turkey can estimate the P(A) as

0.45. And that would be his personal (subjective) estimate.

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Probability Rules
A. MARGINAL (UNCONDITIONAL) PROBABILITY:
• Marginal probability is the probability of the occurrence of a
single event.

• So if we are interested in the likelihood of occurrence of only

one, single event (unconditionally) then in statistics this means
that you are interested in the marginal probability of that
event and represented by the following (familiar) symbol:

P(A) Marginal (or Unconditional) Probability of A

P(B) Marginal (or Unconditional) Probability of B
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B. THE ADDITION RULE:

1. The Addition Rule for Mutually Exclusive

Events
• If Events A, B, and C are mutually exclusive (meaning
they can not happen together at the same time.)

• Then: P(A or B) = P(A) + P(B)

P( A or B or C) = P(A) + P(B) + P(C)

• Questions that can be asked and answered by using

Addition Rule:
Q1: What is the probability of A or B or C taking place?
Q2: What is the probability of A or B taking place? 17
Q3: What is the probability of B or C taking place?
• Example
Suppose that the distribution of the number of students in the
class based on their sex and age is as follows:
Age Male Female Total
20 0 2 2
21 1 3 4
22 6 3 9
23 3 1 4
24 4 0 4
Total 14 9 23
Experiment: Randomly selecting a student in this class.
Events: A: The selected student is 20 years old.
B: The selected student is 21 years old.
C: The selected student is 22 years old.
D: The selected student is 23 years old.

P(A or B) = P(A) + P(B) = 2/23 + 4/23 = 6/23

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P(A or C) = P(A) + P(C) = 2/23 + 9/23 = 11/23
P(A or B or C or D) = P(A) + P(B) + P(C) + P(D) = 2/23 + 4/23 + 9/23
+ 4/23 = 19/23
2. The Addition Rule for Non-Mutually Exclusive
Events

• If A , B and C are non-mutually exclusive events,

Then: P(A or B) = P(A) + P(B) – P(A and B)
P(A or C) = P(A) + P(C) – P(A and C)
P(A or B or C) = P(A) + P(B) + P(C) – P(A and B) – P(A and C) – P(B and C)

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• Example 1
Suppose that the sex and the eye color of students in a class of 40 people are
distributed as follows:

Black Green Total

Male 13 9 22
Female 8 10 18
Total 21 19 40

Experiment: Selecting randomly a student.

Events:
A: Selecting a male student.
B: Selecting a female student.
C: Selecting a black eye student.
D: Selecting a green eye student.
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P(A or C) = P(A) + P(C) – P(A and C) = (22/40 + 21/40) – 13/40 = 30/40
P(B or C) = P(B) + P(C) – P(B and C) = (18/40 + 21/40) – 8/40 = 31/40
• Example 2
Suppose that Ford Motor Corporation produces 3 different models for
Turkish consumers. Annual volume of production and sales of all 3
models combined is 700 units. However, some of the autos sold turned
out to be defective. Based on the past data, the production manager
estimated the following distribution of defective and non-defective
autos for each model manufactured.

A B C Total

Defective 10 20 70 100
Non-Defective 140 180 280 600
Total 150 200 350 700

What is the probability that a randomly selected consumer will buy

either model A or C?
What is the probability that the consumer will buy either model B or a
Defective auto? 21
What is the probability that the consumer will buy either model A or a
Non-defective auto?
• Solution:

P(A or C) = P(A) + P(C) = 150/700 + 350/700 = 500/700

P(B or D) = P(B) + P(D) – P(B and D) = (200/700 + 100/700) –

20/700 = 280/700

P(A or N) = P(A)+P(N) – P(A and N) = (150/700 + 600/700) –

140/700= 610/700

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• Example 3
There are 500 companies whose stocks are traded on Istanbul
stock exchange. These companies operate in these basic sectors
of the economy; Industry, Service, and Mining. Each one of
these companies can report their positive profits and losses for
each year. Based on the past data, financial analysts estimated
the following distribution of the number of companies in each
sector that are likely to report positive profits and losses in the
year 2019:

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 Industry Service Mining Total
Positive Profits 150 240 30 420
Losses 50 10 20 80
Total 200 250 50 500

a. What is the probability of a randomly selected company (out

of these companies listed on Istanbul Stock Exchange) to report
positive profits in year 2020?

b. What is the probability of a randomly selected company to

report either loss in year 2020 or to be from Mining sector?

c. What is the probability of a randomly selected company to be

either from Industry or from Service sector?

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a. P( Positive profits) = 420/500 = 0.84

b. P( Losses or Mining) = P( Losses) + P( Mining) – P( Losses and

Mining)
= 80/500 + 50/500 – 20/500 = 110/500 = 0.22

c. P( Industry or Service) = P(Industry) + P(Service)

=200/500 + 250/500 = 450/500 = 0.9

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