IIMT 2641 Introduction to Business Analytics
Module 1: Probability & Decision Analysis
Topic 1: Probability
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Objectives
1. Understand key probability definitions.
2. Understand and apply probability concepts: intersection,
union, complement, and mutually exclusive using tables,
trees, formulas and Venn diagrams.
3. Understand and solve conditional probability problems using
tables, trees, Venn diagrams and formulas
4. Define independence of events, and use the independence
assumption to solve problems.
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Basic probability concepts
§ Experiment: is a process that produces a single outcome whose result
cannot be predicted with certainty
§ Outcomes of an experiment are the events that might possibly happen
– There are two possible outcomes when flipping a coin: "heads" and "tails"
– There are 52 possible outcomes when picking a card at random from a deck
§ An event is a collection of outcomes
– "The card picked is a spade"
– "The card picked is a seven"
– "The card picked is a jack, queen, or king”
§ Sample Space: is the set of all possible outcomes of an experiment
– Example: Sample space of a single die toss:
S={ } or S = {1,2,3,4,5,6}
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Basic probability concepts
§ Probability is a numerical statement about the likelihood that an event will
occur
§ Notation: P(A) = Probability of event A
§ Two basic rules of probability
§ 0 ≤ 𝑃 𝐴 ≤ 1.
§ The sum of the simple probabilities for all possible outcomes of an
activity (experiment) must equal 1.
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Basic probability concepts
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Today’s Objectives
1. Understand key probability definitions.
2. Understand and apply probability concepts: intersection,
union, complement, and mutually exclusive using formulas
and Venn diagrams.
3. Understand and solve conditional probability problems using
tables, trees, Venn diagrams and formulas
4. Define independence of events, and use the independence
assumption to solve problems.
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Venn Diagram Representations of Probability
Sample Space
Event A Event B
Sample Space
Event A Event B
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Venn Diagram Representations of Probability
Sample Space
Rolling a Rolling a
3 2
Rolling a 1, 4, 5, or 6
Sample Space
Rolling a
Rolling
number
an even
greater
number
than 3
Rolling a number 3 or smaller that is not even (i.e., Rolling a 1 or 3)
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“A intersection B”: aka A ∩ B
“A intersection B” (A ∩ B) indicates the set of outcomes that are common
to both A and B
Sample Space
Event A Event B
“A intersection B” or A∩B or “A and B”
A = watching 1 to 7 movies per month
B = watching 4 or more movies per month
A ∩ B = watching 4 – 7 movies per month
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“A union B”: aka A ∪ B
“A union B” (aka, A∪B) indicates the collection of outcomes that are in A or B.
Sample Space
Event A Event B
“A union B” or A ∪ B or “A or B”
A = watching 1 to 7 movies per month
B = watching 4 or more movies per month
A ∪ B = watching 1 or more movies per month
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“A complement”: aka 𝑨! or 𝑨𝒄
Sample Space
Event A Event B
A’ or “not A” or
“A complement”
P(A’) + P(A) = 1
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Venn Diagram Representations of Probability
Sample Space
Event A Event B
A and B not B and not A
or A ∩ B or A’ ∩ B’
A and not B B and not A
or A ∩ B’ or A’ ∩ B
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In Class Practice: Tea/Coffee
A study by Coffee Academics revealed 40% of undergraduates drink both
coffee and tea. The study also found 70% of undergraduates drink coffee. No
students reported drinking neither coffee nor tea.
1. What is the probability a randomly chosen
undergraduate drinks coffee but not tea?
Coffee Tea
2. What is the probability a randomly chosen
undergraduate drinks tea?
3. What is the probability a randomly chosen
undergraduate drinks tea but not coffee?
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Mutually Exclusive
Mutually Exclusive
– Two events are mutually exclusive if they cannot occur at the same
time
– A and B are mutually exclusive if their intersection is the empty set.
𝐴∩𝐵 = ∅
– Example:
q A = rolling a pair of dice and getting at least one 2
q B = rolling a pair of dice and getting a sum of 12
If A and B are Mutually Exclusive , then P(A or B) = P(A) + P(B).
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Collectively Exhaustive
A set of events are said to be collectively exhaustive if at least one of
them must occur.
If A and B are collectively exhaustive, then P(A or B) = 1.
Example:
q A = rolling a dice and getting at least 3
q B = rolling a dice and getting at most 4
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In-class Exercises
Mutually Collectively
Two events: A and B
Exclusive Exhaustive
1. Draw a spade and a club Yes No
2. Draw a face card and a number card Yes Yes
3. Draw an ace and a 3 Yes No
4. Draw a club and a non-club Yes Yes
5. Draw a 5 and a diamond No No
6. Draw a red card and a non-diamond No Yes
Useful Probability Rules
§ Rule 1: The probability of any event is a number between zero and one:
0 ≤ P(A) ≤ 1.
§ Rule 2: Additive rule for probability of union of two events
P( A È B) = P( A) + P(B) - P( A Ç B)
§ Rule 3: (Law of Total Probability): For any two events A and B, we have
P( A) = P( A Ç B) + P( A Ç B' )
We are utilizing the property that B and B’ are mutually exclusive and
collectively exhaustive!
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Today’s Objectives
1. Understand key probability definitions.
2. Understand and apply probability concepts: intersection,
union, complement, and mutually exclusive using formulas
and Venn diagrams.
3. Understand and solve conditional probability problems using
tables, trees, Venn diagrams and formulas
4. Define independence of events, and use the independence
assumption to solve problems.
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Conditional Probability
Conditional Probability: Probability of “A given B” = P(A|B)
§ The probability of A, given that B has already happened.
§ The probability of A, given that we are “in” B.
§ The probability of A, given we know B is true.
Additional (new) information allows us to re-assess the likelihood of the event.
Probability may change.
Prior Probability This is our initial assessment of the likelihood of A
Number of times 𝐴 occurs
𝑃 𝐴 = Example: A: the card picked is a Queen
Number of trials
Conditional This is our updated assessment of the likelihood of A
Probability after observing that B occurred.
𝑃 𝐴𝐵 Example: B: the card picked is a face card
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Conditional Probability
Conditional Probability: Probability of A given B = P(A|B)
What is the correct way to say P(A|B)?
Probability of:
• “A given B”
• “A conditional on B”
Our new population (Sample Space) is restricted to “B”
and we are interested in the likelihood that A occurs
within this new population.
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Conditional Probability Formula
Sample Space
𝑷(𝑨 ∩ 𝑩)
Event A Event B
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Conditional Probability Formula
Percentage of cases both 𝐴 and 𝐵 occur 𝑃(𝐴 ∩ 𝐵)
𝑃 𝐴𝐵 = =
Percentage of cases 𝐵 occurs 𝑃(𝐵)
Sample Space
𝑷(𝑨 ∩ 𝑩)
Event A Event B
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Conditional Probability Formula
Percentage of cases both 𝐴 and 𝐵 occur 𝑃(𝐴 ∩ 𝐵)
𝑃 𝐴𝐵 = =
Percentage of cases 𝐵 occurs 𝑃(𝐵)
Sample Space
𝑷(𝑨 ∩ 𝑩) B B’
A 𝑷(𝑨 ∩ 𝑩)
Event A Event B
A’ 𝑷(𝑨′ ∩ 𝑩)
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𝑷 𝑨 ∩ 𝑩 + 𝑷 𝑨! ∩ 𝑩 = 𝑷(𝑩)
Conditional Probability Formula
Let A denote "the card picked is the queen of any suit"
and B denote "the card picked is a face card", then
𝑃 𝐴 𝐵 =?
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A Property of Conditional Probability
Because conditional probability is focusing on the sub-space where the event
has occurred, the following property holds:
1 = 𝑃 𝐴 𝐵 + 𝑃 𝐴′ 𝐵
Sample Space
B B’
A
Event A Event B
A’
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Coffee and Tea, Revisited
A study by Campus Coffee revealed 40% of undergraduates drink both coffee
and tea. The study also found 70% of undergraduates drink coffee. No
students reported drinking neither coffee nor tea.
Coffee Coffee’
Coffee Tea
Tea
Tea’
1. Given a person drinks coffee, what is the probability they drink tea?
2. What percentage of undergraduates drink tea but not coffee?
3. If a friend (an undergraduate) of yours does not drink tea, what is the
probability they do drink coffee?
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A Tale of Two Suppliers, Opposite Conditional
BYD uses machine parts from two suppliers (supplier G in Guangzhou and
supplier D in Dongguan), and occasionally receives bad parts due to
machine breakdowns. BYD gets 60% of the parts from supplier G and 40%
of the parts from supplier D. It is known 3.8% of parts are bad overall. And
it is known for a randomly selected bad part, there is a 79% chance it is
from supplier G.
Given that a part is from Supplier G, what is the probability it is bad?
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Bayes’ Rule
For two events: A and B
𝑃 𝐵 𝐴 𝑃(𝐴) 𝑃(𝐴 ∩ 𝐵) This formula helps you find P(A|B)
𝑃 𝐴𝐵 = =
𝑃(𝐵) 𝑃(𝐵) when you’re not given P(A ∩ B).
𝑃(𝐴 ∩ 𝐵) 𝑃(𝐴 ∩ 𝐵) 𝑃(𝐴 ∩ 𝐵)
𝑃 𝐴𝐵 = = =
𝑃(𝐵) 𝑃 𝐵 ∩ 𝐴 + 𝑃(𝐵 ∩ 𝐴! ) 𝑃 𝐵 𝐴 𝑃 𝐴 + 𝑃 𝐵 𝐴! 𝑃(𝐴! )
𝑃(𝐴 ∩ 𝐵) 𝑃 𝐵 𝐴 𝑃(𝐴) 𝑃 𝐵 𝐴 𝑃(𝐴)
𝑃 𝐴𝐵 = = =
𝑃(𝐵) 𝑃 𝐵 ∩ 𝐴 + 𝑃(𝐵 ∩ 𝐴! ) 𝑃 𝐵 𝐴 𝑃 𝐴 + 𝑃 𝐵 𝐴! 𝑃(𝐴! )
These formulas help you find P(A|B) when you’re not given P(A ∩ B) or P(B).
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A Tale of Two Suppliers, Opposite Conditional
Given that a part is from Supplier G, what is the probability it is bad?
𝑃 𝐵 𝐴 𝑃(𝐴) 𝑷(𝑨 ∩ 𝑩) 𝑃 𝐵𝑎𝑑 𝐺 =
"($∩&'()
=
?
𝑷 𝑨𝑩 = = "($) +.-
𝑃(𝐵) 𝑷(𝑩)
We can find a formula for intersection:
𝑷(𝑨 ∩ 𝑩) = 𝑷 𝑨 𝑩 ∗ 𝑷(𝑩) We can now apply a formula for intersection:
"($∩&'() (()|+,-)((+,-)
𝑃 𝐵𝑎𝑑 𝐺 = =
"($) ..0
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Covid Testing
} Covid tests aim to confirm or rule out COVID-19 infection
in people with or without COVID-19 symptoms.
} PCR tests – laboratory test, 24 hours.
} Rapid Antigen tests – 15 minutes.
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Covid Testing
} PCR tests typically have variable sensitivities and high
specificities. Consider the following situation:
} Base Rate for Covid
} P(Covid) = 0.2
} Covid test is positive (+) or negative (-)
} Test performance statistics
} Sensitivity: P(Positive | Covid) = 0.90
} Specificity: P(Negative | Not Covid) = 0.95
} Sensitivity and Specificity values are based on controlled
experiments.
} P(Covid | Positive) = ?
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Sensitivity/Specificity
Negative (Test result) Positive (Test result)
Not Covid True Negatives (TN) False Positives (FP)
Covid False Negatives (FN) True Positives (TP)
."
Sensitivity: P(Positive | Covid) =
."/01
.1
Specificity: P(Negative | Not Covid) =
.1/0"
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Covid testing
1. What proportion of patients do not have Covid and test negative?
2. What proportion of patients have Covid and test negative?
3. What proportion of patients test negative?
4. What proportion of patients test positive?
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Covid Testing
§ Draw a tree here to find joint probabilities
0.9 +
Covid (C)
0.2
0.1 -
0.05 +
0.8
Not (C’)
0.95 -
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Covid testing
§ Fill the table that contains P(C∩+), P(C∩-), P(C’∩+),
P(C’∩-), P(+), P(-), P(C), P(C’)
Positive (+) Negative (-)
Covid (C)
Not Covid (C’)
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Covid testing
§ Find posterior probabilities P(C|+), P(C’|+) , P(C|-) , P(C’|-)
using your table
Positive (+) Negative (-)
Covid (C)
Not Covid (C’)
P(C|+) = P(C|-) =
P(C’|+) = P(C’|-) =
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Covid Testing
} Covid tests aim to confirm or rule out COVID-19 infection
in people with or without COVID-19 symptoms.
} PCR tests – laboratory test, 24 hours.
} Rapid Antigen tests – 15 minutes.
Precision of Rapid Antigen tests
In people who show symptoms of COVID-19, antigen testing is more
reliable because there’s more virus to capture in the sample.
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[Link]
Today’s Objectives
1. Understand key probability definitions.
2. Understand and apply probability concepts: intersection,
union, complement, and mutually exclusive using formulas
and Venn diagrams.
3. Understand and solve conditional probability problems using
tables, trees, Venn diagrams and formulas
4. Define independence of events, and use the independence
assumption to solve problems.
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Independence: The Concept
§ Two events are independent if the occurrence of one event has no effect
on the probability that the other event occurs.
0.5 Heads
Heads
0.5
0.5 Tails
0.5 Heads
0.5
Tails
0.5 Tails
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Independence: The Concept
§ Two events are NOT independent if the occurrence of one event has an
effect on the probability that the other event occurs.
§ Assume we have a drawer with 2 blue socks and 1 red sock, and we pick a
sock twice without replacement. 1/2 Blue Sock
Blue Sock
2/3
1/2 Red Sock
2/2 Blue Sock
1/3
Red Sock
0/2
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Red Sock
Independence: The Math
For P(A)>0 and P(B)>0, A and B are independent, if and only if one of the
following is true: P(A Ç B)
P(A | B) = = P(A)
P(B)
P(A Ç B)
P(B | A) = = P(B)
P(A)
P(A Ç B) = P(A)P(B)
If one of these is true, then the other two are also true.
How do I use these formulas?
1. The problem says “Assume A and B are independent”, then you are
allowed to use these formulas. If a problem does not say that, these
formulas are invalid. Do not use them.
2. The problem says “Are A and B independent?”, then you can check to see
if these formulas
45 hold true. You only need to show one formula is true.
Independence Example
Example 1: It is known P(A) = 0.1 and P(B) = 0.4. It is also
known A and B are independent events. What is P(A∩B)?
Example 2: It is known P(A|B) = 0.5. It is also known A and B
are independent events. What is P(A)?
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Independence Example
Example 3: Two dice (red and blue) are rolled.
A = The sum is exactly 7.
B = The sum is exactly 12.
C = The red die rolled a 6.
Are A and C independent? (Check if P(A)*P(C) = P(A∩C))
Are B and C independent? (Check if P(B)*P(C) = P(B∩C))
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Today’s Objectives
1. Understand key probability definitions.
2. Understand and apply probability concepts: intersection,
union, complement, and mutually exclusive using formulas
and Venn diagrams.
3. Understand and solve conditional probability problems using
tables, trees, Venn diagrams and formulas
4. Define independence of events, and use the independence
assumption to solve problems.
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