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LDC INSTITUTE OF TECHNICAL

STUDIES

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M.B.A 1ST YEAR (SEMESTER-2)
SUBJECT CODE- KMBN104
BUSINESS STATISTICS AND ANALYSIS
UNIT -4

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Probability Meaning and Approaches of Probability Theory

In our day to day life the “probability” or “chance” is very commonly used
term. Sometimes, we use to say “Probably it may rain tomorrow”,
“Probably Mr. X may come for taking his class today”, “Probably you are
right”. All these terms, possibility and probability convey the same
meaning. But in statistics probability has certain special connotation
unlike in Layman’s view.

The theory of probability has been developed in 17th century. It has got
its origin from games, tossing coins, throwing a dice, drawing a card from
a pack. In 1954 Antoine Gornband had taken an initiation and an interest
for this area.

After him many authors in statistics had tried to remodel the idea given by the
former. The “probability” has become one of the basic tools of statistics.
Sometimes statistical analysis becomes paralyzed without the theorem of
probability. “Probability of a given event is defined as the expected
frequency of occurrence of the event among events of a like sort.”
(Garrett)

The probability theory provides a means of getting an idea of the

likelihood of occurrence of different events resulting from a random
experiment in terms of quantitative measures ranging between zero and
one. The probability is zero for an impossible event and one for an event
which is certain to occur.

Approaches of Probability Theory

1. Classical Probability

The classical approach to probability is one of the oldest and simplest

school of thought. It has been originated in 18th century which explains
probability concerning games of chances such as throwing coin, dice,
drawing cards etc.

The definition of probability has been given by a French mathematician

named “Laplace”. According to him probability is the ratio of the number
of favourable cases among the number of equally likely cases.

Or in other words, the ratio suggested by classical approach is:

Pr. = Number of favourable cases/Number of equally likely cases

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For example, if a coin is tossed, and if it is asked what is the probability of

the occurrence of the head, then the number of the favourable case = 1,
the number of the equally likely cases = 2.

Pr. of head = 1/2

Symbolically it can be expressed as:

P = Pr. (A) = a/n, q = Pr. (B) or (not A) = b/n

1 – a/n = b/n = (or) a + b = 1 and also p + q = 1

p = 1 – q, and q = 1 – p and if a + b = 1 then so also a/n + b/n = 1

In this approach the probability varies from 0 to 1. When probability is

zero it denotes that it is impossible to occur.

If probability is 1 then there is certainty for occurrence, i.e. the event is

bound to occur.

Example:

From a bag containing 20 black and 25 white balls, a ball is drawn

randomly. What is the probability that it is black.

Pr. of a black ball = 20/45 = 4/9 = p, 25 Pr. of a white ball = 25/45 = 5/9
=q

p = 4/9 and q = 5/9 (p + q= 4/9 + 5/9= 1)

2. Relative Frequency Theory of Probability

This approach to probability is a protest against the classical approach. It

indicates the fact that if n is increased upto the ∞, we can find out the
probability of p or q.

Example:

If n is ∞, then Pr. of A= a/n = .5, Pr. of B = b/n = 5

If an event occurs a times out of n its relative frequency is a/n. When n

becomes ∞, is called the limit of relative frequency.

Pr. (A) = limit a/n

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where n → ∞

Pr. (B) = limit bl.t. here → ∞.

Axiomatic approach

An axiomatic approach is taken to define probability as a set function

where the elements of the domain are the sets and the elements of range
are real numbers. If event A is an element in the domain of this function,
P(A) is the customary notation used to designate the corresponding
element in the range.

Probability Function

A probability function p(A) is a function mapping the event space A of a

random experiment into the interval [0,1] according to the following
axioms;

Axiom 1. For any event A, 0 ≤ P(A) ≤ 1

Axiom 2. P(Ω) = 1

Axiom 3. If A and B are any two mutually exclusive events then,

P(A ∪ B)) = P(A) + P(B)

As given in the third axiom the addition property of the probability can be
extended to any number of events as long as the events are mutually
exclusive. If the events are not mutually exclusive then;

P(A ∪ B) = P(A) + P(B) – P(A∩B)

P(A∩B) is Φ if both the events are mutually exclusive.

If there are two types of objects among the objects of similar or other
natures then the probability of one object i.e. Pr. of A = .5, then Pr. of B
= .5.

Addition and Multiplication Theorems

Addition theorem on probability:

If A and B are any two events then the probability of happening of at least
one of the events is defined as P(AUB) = P(A) + P(B)- P(A∩B).

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Proof:

Since events are nothing but sets,

From set theory, we have

n(AUB) = n(A) + n(B)- n(A∩B).

Dividing the above equation by n(S), (where S is the sample space)

n(AUB)/ n(S) = n(A)/ n(S) + n(B)/ n(S)- n(A∩B)/ n(S)

Then by the definition of probability,

P(AUB) = P(A) + P(B)- P(A∩B).

Example:

If the probability of solving a problem by two students George and James

are 1/2 and 1/3 respectively then what is the probability of the problem to
be solved.

Solution:

Let A and B be the probabilities of solving the problem by George and

James respectively.

Then P(A)=1/2 and P(B)=1/3.

The problem will be solved if it is solved at least by one of them also.

So, we need to find P(AUB).

By addition theorem on probability, we have

P(AUB) = P(A) + P(B)- P(A∩B).

P(AUB) = 1/2 +.1/3 – 1/2 * 1/3 = 1/2 +1/3-1/6 = (3+2-1)/6 = 4/6 = 2/3

Note:

If A and B are any two mutually exclusive events then P(A∩B)=0.

Then P(AUB) = P(A)+P(B).

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Multiplication theorem on probability

If A and B are any two events of a sample space such that P(A) ≠0 and
P(B)≠0, then

P(A∩B) = P(A) * P(B|A) = P(B) *P(A|B).

Example: If P(A) = 1/5 P(B|A) = 1/3 then what is P(A∩B)?

Solution: P(A∩B) = P(A) * P(B|A) = 1/5 * 1/3 = 1/15

INDEPENDENT EVENTS:

Two events A and B are said to be independent if there is no change in the

happening of an event with the happening of the other event.

i.e. Two events A and B are said to be independent if

P(A|B) = P(A) where P(B)≠0.

P(B|A) = P(B) where P(A)≠0.

i.e. Two events A and B are said to be independent if

P(A∩B) = P(A) * P(B).

Example:

While laying the pack of cards, let A be the event of drawing a diamond
and B be the event of drawing an ace.

Then P(A) = 13/52 = 1/4 and P(B) = 4/52=1/13

Now, A∩B = drawing a king card from hearts.

Then P(A∩B) = 1/52

Now, P(A/B) = P(A∩B)/P(B) = (1/52)/(1/13) = 1/4 = P(A).

So, A and B are independent.

[Here, P(A∩B) = = = P(A) * P(B)]

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Note:

(1) If 3 events A,B and C are independent the

P(A∩B∩C) = P(A)*P(B)*P(C).

(2) If A and B are any two events, then P(AUB) = 1-P(A’)P(B’).

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Baye’s Rule
Bayes’ theorem is a way to figure out conditional probability. Conditional
probability is the probability of an event happening, given that it has some
relationship to one or more other events. For example, your probability of
getting a parking space is connected to the time of day you park, where
you park, and what conventions are going on at any time. Bayes’ theorem
is slightly more nuanced. In a nutshell, it gives you the
actual probability of an event given information about tests.

“Events” Are different from “tests.” For example, there is a test for liver
disease, but that’s separate from the event of actually having liver
disease.

Tests are flawed: just because you have a positive test does not mean you
actually have the disease. Many tests have a high false positive rate. Rare
events tend to have higher false positive rates than more common events.
We’re not just talking about medical tests here. For example, spam filtering can
have high false positive rates. Bayes’ theorem takes the test results and
calculates your real probability that the test has identified the event.

Bayes’ Theorem (also known as Bayes’ rule) is a deceptively simple

formula used to calculate conditional probability. The Theorem was
named after English mathematician Thomas Bayes (1701-1761). The
formal definition for the rule is:

In most cases, you can’t just plug numbers into an equation; You have to
figure out what your “tests” and “events” are first. For two events, A and
B, Bayes’ theorem allows you to figure out p(A|B) (the probability that
event A happened, given that test B was positive) from p(B|A) (the
probability that test B happened, given that event A happened). It can be
a little tricky to wrap your head around as technically you’re working
backwards; you may have to switch your tests and events around, which
can get confusing. An example should clarify what I mean by “switch the
tests and events around.”

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Bayes’ Theorem Example

You might be interested in finding out a patient’s probability of having
liver disease if they are an alcoholic. “Being an alcoholic” is the test (kind
of like a litmus test) for liver disease.

A could mean the event “Patient has liver disease.” Past data tells you
that 10% of patients entering your clinic have liver disease. P(A) = 0.10.

B could mean the litmus test that “Patient is an alcoholic.” Five percent of
the clinic’s patients are alcoholics. P(B) = 0.05.

You might also know that among those patients diagnosed with liver
disease, 7% are alcoholics. This is your B|A: the probability that a patient
is alcoholic, given that they have liver disease, is 7%.

Bayes’ theorem tells you:

P(A|B) = (0.07 * 0.1)/0.05 = 0.14
In other words, if the patient is an alcoholic, their chances of having liver
disease is 0.14 (14%). This is a large increase from the 10% suggested by
past data. But it’s still unlikely that any particular patient has liver
disease.

Probability Distribution: Binominal Poisson, Normal Distribution

Probability Distributions
Probability theory is the foundation for statistical inference. A probability
distribution is a device for indicating the values that a random variable
may have. There are two categories of random variables. These are
discrete random variables and continuous random variables.

PDiscrete random variable

The probability distribution of a discrete random variable specifies all possible

values of a discrete random variable along with their respective probabilities.

Examples can be

 Frequency distribution
 Probability distribution (relative frequency distribution)
 Cumulative frequency

Examples of discrete probability distributions are the binomial distribution

and the Poisson distribution.

Binomial Distribution

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A binomial experiment is a probability experiment with the following

properties.

1. Each trial can have only two outcomes which can be considered
success or failure.
2. There must be a fixed number of trials.
3. The outcomes of each trial must be independent of each other.
4. The probability of success must remain the same in each trial.

The outcomes of a binomial experiment are called a binomial distribution.

Poisson Distribution

The Poisson distribution is based on the Poisson process.

1. The occurrences of the events are independent in an interval.

2. An infinite number of occurrences of the event are possible in the
interval.
3. The probability of a single event in the interval is proportional to the
length of the interval.
4. In an infinitely small portion of the interval, the probability of more
than one occurrence of the event is negligible.

Continuous probability distributions

A continuous variable can assume any value within a specified interval of

values assumed by the variable. In a general case, with a large number of
class intervals, the frequency polygon begins to resemble a smooth curve.

A continuous probability distribution is a probability density function. The

area under the smooth curve is equal to 1 and the frequency of
occurrence of values between any two points equals the total area under
the curve between the two points and the x-axis.

The Normal Distribution

The normal distribution is the most important distribution in biostatistics.
It is frequently called the Gaussian distribution. The two parameters of
the normal distribution are the mean (m) and the standard deviation (s).
The graph has a familiar bell-shaped curve.

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Graph of a Normal Distribution

Characteristics of the normal distribution

1. It is symmetrical about m.

2. The mean, median and mode are all equal.

3. The total area under the curve above the x-axis is 1 square unit.
Therefore 50% is to the right of m and 50% is to the left of m.

4. Perpendiculars of:
± s contain about 68%;
±2 s contain about 95%;
±3 s contain about 99.7%
of the area under the curve.

The standard normal distribution

A normal distribution is determined by m and s. This creates a family of

distributions depending on whatever the values of m and s are. The
standard normal distribution has m =0 and s =1.

Finding normal curve areas

1. The table gives areas between – and the value of .

2. Find the z value in tenths in the column at left margin and locate its
row. Find the hundredths place in the appropriate column.

3. Read the value of the area (P) from the body of the table where the row
and column intersect. Note that P is the probability that a given value of z
is as large as it is in its location. Values of P are in the form of a decimal
point and four places. This constitutes a decimal percent.

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Finding probabilities

We find probabilities using the table and a four-step procedure as

illustrated below.

a) What is the probability that z < -1.96?

(1) Sketch a normal curve

(2) Draw a line for z = -1.96
(3) Find the area in the table
(4) The answer is the area to the left of the line P(z < -1.96) = .0250

b) What is the probability that -1.96 < z < 1.96?

(1) Sketch a normal curve

(2) Draw lines for lower z = -1.96, and upper z = 1.96
(3) Find the area in the table corresponding to each value
(4) The answer is the area between the values–subtract lower from
upper P(-1.96 < z < 1.96) = .9750 – .0250 = .9500

c) What is the probability that z > 1.96?

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(1) Sketch a normal curve

(2) Draw a line for z = 1.96
(3) Find the area in the table
(4) The answer is the area to the right of the line; found by subtracting
table value from 1.0000; P(z > 1.96) =1.0000 – .9750 = .0250

Applications of the Normal distribution

The normal distribution is used as a model to study many different
variables. We can use the normal distribution to answer probability
questions about random variables. Some examples of variables that are
normally distributed are human height and intelligence.

Solving normal distribution application problems

In this explanation we add an additional step. Following the model of the

normal distribution, a given value of x must be converted to a z score
before it can be looked up in the z table.

(1) Write the given information

(2) Sketch a normal curve
(3) Convert x to a z score
(4) Find the appropriate value(s) in the table
(5) Complete the answer

Illustrative Example: Total fingerprint ridge count in humans is

approximately normally distributed with mean of 140 and standard
deviation of 50. Find the probability that an individual picked at random
will have a ridge count less than 100. We follow the steps to find the
solution.

(1) Write the given information

m= 140
s= 50

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x = 100

(3) Convert x to a z score

(4) Find the appropriate value(s) in the table

A value of z = -0.8 gives an area of .2119 which corresponds to the

probability P (z < -0.8)

(5) Complete the answer

The probability that x is less than 100 is .2119.

Application of Binomial; Poisson and Normal distributions

The binomial distribution has its applications in experiments in probability
subject to certain constraints. These are:

PThere is a fixed number of trials – for example toss a coin 20

times.

1. The outcomes are independent and there are just two

possible outcomes-in the example I will use, these are head
and tail.
2. The probability of a head plus the probability of a tail must
equal 1.

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3. The probability of 8 heads and 12 tails would be 20C8 x

P(H)^8 x P(T)^12.
4. Now any experiment in which the outcomes are of just two
kinds and whose probability combined equals 1, can be
regarded as binomial.

Data from the analyses of reference samples often must be used to

determine the quality of the data being produced by laboratories that
routinely make chemical analyses of environmental samples. When a
laboratory analyzes many reference samples, binomial distributions can
be used in evaluating laboratory performance. The number of standard
deviations (that is, the difference between the reported value and most
probable value divided by the theoretical standard deviation) is calculated
for each analysis. Individual values exceeding two standard deviations are
considered unacceptable, and a binomial distribution is used to determine
if overall performance is satisfactory or unsatisfactory. Similarly, analytical
bias is examined by applying a binomial distribution to the number of
positive and negative standard deviations.

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