Sample Population

Summary Summary
Inference
(Statistic/Estimator) (Parameter)

Sampling
Population
Distribution
Distribution
(Z, t, chi-square, Inference (Binomial, Poisson,
F)
Normal)
Probability
• Annabel Gonzalez, chief retail analyst at marketing firm
Longmeadow Consultants is tracking the sales of
compression-gear produced by Under Armour, Inc., Nike,
Inc., and Adidas Group.
• Annabel wants to determine whether age influences
brand choice.
• Annabel Gonzalez, chief retail analyst at marketing firm
Longmeadow Consultants is tracking the sales of
compression-gear produced by Under Armour, Inc., Nike,
Inc., and Adidas Group.
• Annabel wants to determine whether age influences
brand choice.
• After collecting data from 600 recent purchases, following
information is obtained.
Relative Frequency Approach…
Relative Frequency = class frequency/total frequency
 What is Probability?

1.Numerical measure of
1 Sure
likelihood that the event
will occur
2.Lies between 0 & 1
.5

0 Impossible
Joint, Marginal, Conditional Probability…
We study methods to determine probabilities of events that result from
combining other events in various ways.

There are several types of combinations and relationships between events:

•Complement event
•Intersection of events
•Union of events
•Mutually exclusive events
•Dependent and independent events
Complement of an Event…
The complement of event A is defined to be the event consisting of all
sample points that are “not in A”.

Complement of A is denoted by Ac

The Venn diagram below illustrates the concept of a complement.

A Ac
P(A) + P(Ac ) = 1
Complement of an Event…
For example, the rectangle stores all the possible tosses of 2 dice {(1,1),
1,2),… (6,6)} Let A = tosses totaling 7 {(1,6),
(2, 5), (3,4), (4,3), (5,2), (6,1)}

P(Total = 7) + P(Total not equal to 7) = 1

A Ac
Intersection of Two Events…
The intersection of events A and B is the set of all sample points that
are in both A and B.

The intersection is denoted: A and B

The joint probability of

A and B is the probability of
the intersection of A and B, A B
i.e. P(A and B)
Intersection of Two Events…
For example, let A = tosses where first toss is 1 {(1,1), (1,2), (1,3), (1,4), (1,5),
(1,6)}
and B = tosses where the second toss is 5 {(1,5), (2,5), (3,5), (4,5), (5,5), (6,5)}

The intersection is {(1,5)}

The joint probability of

A and B is the probability of
the intersection of A and B, A B
i.e. P(A and B) = 1/36
Union of Two Events…(Exhaustive Events)
The union of two events A and B, is the event containing all sample
points that are in A or B or both:
Union of A and B is denoted: A or B

A B
Union of Two Events…
For example, let A = tosses where first toss is 1 {(1,1), (1,2), (1,3), (1,4), (1,5), (1,6)}
and B is the tosses that the second toss is 5 {(1,5), (2,5), (3,5), (4,5), (5,5), (6,5)}

Union of A and B is {(1,1), (1,2), (1,3), (1,4), (1,5), (1,6)}

(2,5), (3,5), (4,5), (5,5), (6,5)}

A B
Mutually Exclusive Events…
When two events are mutually exclusive (that is the two events cannot
occur together), their joint probability is 0, hence:

A B

Mutually exclusive; no points in common…

For example A = tosses totaling 7 and B = tosses totaling 11
Basic Relationships of Probability…
Complement of Event Union of Events

A Ac A B

Intersection of Events Mutually Exclusive Events

A B
A B
 Example
• Focus Mall in Calicut is considering opening a 3-screen multiplex and has recently
performed a resident survey as part of its decision making process. One question
of particular interest is how often a respondent goes to a movie during one
month.
• Possible outcomes are : E1 ≥10, E2: 3 to 9, E3:1 to 2 , E4: 0
• Through relative frequency approach, corresponding probabilities are calculated
as 400/5,000 =0.08,1,900/5,000=0.38,1,500/5,000 0.30 and 1,200/5,000 = 0.24
respectively
• Let E : Respondent attends 1 to 9 movies
• The outcomes that make up E are E={E2, E3} which are m.e.
• P(E)= P(E2) + P(E3)= 0.38 + 0.30= 0.68
Contd..
• Suppose the people who conducted the survey for Focus mall also asked questions
about the respondents’ ages. The company’s managers consider age important in
deciding on location because its theaters do better in areas with a younger population
base.
• Possible outcomes are : E5 <30, E6: 30 to 50, E7: >50 along with the frequencies
E5 E6 E7 Total
E1 200 100 100 400
E2 600 900 400 1900
E3 400 600 500 1500
E4 700 500 0 1200
Total 1900 2100 1000 5000

• Wish to obtain probability that a randomly chosen respondent will be either in the age
group 30-50 or never watches a movie
• P( E4 or E6)=?? ; P(E3 or E7)=?
Example
Why are some mutual fund managers more successful than others?
One possible factor is where the manager earned his or her MBA. The
following table compares mutual fund performance against the ranking
of the school where the fund manager earned their MBA:
Mutual fund outperforms Mutual fund doesn’t
the market outperform the market
Top 20 MBA program .11 .29
Not top 20 MBA program .06 .54

E.g. This is the probability that a mutual fund

outperforms AND the manager was in a top-
20 MBA program; it’s a joint probability.
Example
Alternatively, we could introduce shorthand notation to represent the
events:
A1 = Fund manager graduated from a top-20 MBA program
A2 = Fund manager did not graduate from a top-20 MBA program
B1 = Fund outperforms the market
B2 = Fund does not outperform the market

B1 B2
A1 .11 .29
A2 .06 .54

E.g. P(A2 and B1) = .06

= the probability a fund outperforms the market
and the manager isn’t from a top-20 school.
Marginal Probabilities…
Marginal probabilities are computed by adding across rows and down
columns; that is they are calculated in the margins of the table:
P(A2) = .06 + .54
“what’s the probability a fund
manager isn’t from a top school?”

B1 B2 P(Ai)
A1 .11 .29 .40
A2 .06 .54 .60
P(Bj) .17 .83 1.00

P(B1) = .11 + .06 BOTH margins must add to 1

“what’s the probability a fund (useful error check)
outperforms the market?”
Conditional Probability…
Conditional probability is used to determine how two events are
related; that is, we can determine the probability of one event given
the occurrence of another related event.
Conditional probabilities are written as P(A | B) and read as “the
probability of A given B” and is calculated as:
Conditional Probability…
Again, the probability of an event given that another event has
occurred is called a conditional probability…

Note how “A given B” and “B given A” are related…

Conditional Probability…
What’s the probability that a fund will outperform the market given
that the manager graduated from a top-20 MBA program?
Recall:
A1 = Fund manager graduated from a top-20 MBA program
A2 = Fund manager did not graduate from a top-20 MBA program
B1 = Fund outperforms the market
B2 = Fund does not outperform the market

Thus, we want to know “what is P(B1 | A1) ?”

Conditional Probability…

We want to calculate P(B1 | A1)

B1 B2 P(Ai)
A1 .11 .29 .40
A2 .06 .54 .60
P(Bj) .17 .83 1.00

Thus, there is a 27.5% chance that that a fund will outperform the market
given that the manager graduated from a top-20 MBA program.
 USING TABLE
A consulting firm investigated attrition rate of employees of different companies
due to dissatisfaction with the company. A total of 1200 employees are surveyed
and the following information was obtained.

Not Total
Satisfied Satisfied
Leaving 512 77 589
Not Living 556 55 611
Total 1068 132 1200
 Satisfied Not-satisfied Total

Leaving 0.427 0.064 0.491

Not leaving 0.463 0.046 0.509

Total 0.890 0.110 1

Let L: Leaving ; NL: Not leaving; S: Satisfied; NS: Not satisfied

P( L S )  ; P ( NL S ) 
P ( S L)  ; P ( NS L) 
P ( L NS )  ; P ( NL NS ) 
 Tree Diagram
Example: Employee Survey Joint
Probability
Leaving .427
Satisfied P(B\A)=0.48
Not leaving
P(A)=.89 .462
Employee P(B`\A)=0.52

Leaving .063
Not
Satisfied P(B\A`)=0.58
Not Leaving .046
P(Ā)=.11
P(B`\A`)=0.42
Independence…
One of the objectives of calculating conditional probability is to determine
whether two events are related.

In particular, we would like to know whether they are independent, that is, if
the probability of one event is not affected by the occurrence of the other
event.

Two events A and B are said to be independent if

P(A|B) = P(A)
or
P(B|A) = P(B)
Independence…
For example, we saw that

P(B1 | A1) = .275

The marginal probability for B1 is: P(B1) = 0.17

Since P(B1|A1) ≠ P(B1), B1 and A1 are not independent events.

Stated another way, they are dependent. That is, the probability of one event
(B1) is affected by the occurrence of the other event (A1).
Union…
We stated earlier that the union of two events is denoted as:
A or B. We can use this concept to answer questions like:

Determine the probability that a fund outperforms the market or the

manager graduated from a top-20 MBA program.