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Quantitative Methods
Quantifying Uncertainty: Basic Concepts of Probability
Uncertainty
Each Statement Involves Uncertainty. Chances = Odds = Likelihood = Probability Real Life is Usually Full of Uncertainty. Almost Nothing is for Sure. There are Chances of Something Happening and Chances of Something Else Happening. In Such Situations, You cant Prove Anything. All You Can Do is to Assign a Probability to Each of the Different Possible Outcomes.
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Probability Theory
How Do You Say 90% Chances, or 80:20 Odds, or 75% Confidence? Probability Theory Provides Tools to Decision Makers to Quantify Uncertainties.
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Assigning Probabilities
Classical Approach: Assumes equally likely outcomes (card games ,dice games, tossing coins and the like) Relative Frequency Approach: Uses relative frequencies of past occurrences as probabilities (Decision problems in area of management. Delay in delivery of product) Subjective Approach :Guess based on past experience or intuition.( At higher level of managerial decisions for important ,specific and unique decisions
Subjective Probability
Based on personal judgements Uses individuals experience and familiarity with facts An expert analyst of share prices may give his judgement as follows on price of ACC shares in next two months 20% probability of increase by Rs500or more 60% probability of increase by less than Rs500 20%probability of remaining unchanged
Experiment
Experiment: An experiment is some act, trial or operation that results in a set of possible outcomes. -The roll of two dice to note the sum of spots -The toss of a coin to see the face that turns up. - polling - inspecting an assembly line - counting arrivals at emergency room - following a diet
Event
Event: An event means any collection of possible outcomes when an experiment is performed. For example, When an unbiased die is rolled we may get either spot 1, spot 2, spot 3, spot 4, spot 5 or spot 6. Appearance of anyone of the spots is an event. Appearance of an even spot is also an event.
EVENT/OUTCOME
-The roll of two dice (Appearance of the sum of spots ) -The toss of a coin( the face that turns up) - polling (Win or lose) - inspecting an assembly line(Number of defectives) - counting arrivals at emergency room(Number of arrivals in one hour) - following a diet (weight loss or gain)
Sample space
Sample space: the set of all sample points (simple events) for an experiment is called a sample space; or set of all possible outcomes for an experiment Venn diagram :It is a pictorial representation of the sample space.It is usually drawn as a rectangular figure representing the sample space and circles representing events in the sample space.
Exhaustive Events
Exhaustive Events: Events are said to be exhaustive when they include all possible cases or outcomes. For example, in tossing of fair coin, the two events appearance of a head and appearance of a tail are exhaustive events because when a coin is tossed we would get either a head or a tail.
Independent Events
Independent Events: Two events A and B are said to be independent if occurrence of A does not affect and is not affected by the occurrence of B. When a coin is tossed twice the result of the first toss does not affect and is not affected by the result of the second toss. Thus, the result of the first toss and the result of the second toss are independent events.
Dependent Events
Dependent Events: Two events A and B are called dependent if the occurrence of A affects or is affected by the occurrence of B. For example, there are four kings in a pack of 52 cards. The event of drawing a king at the first draw and the event of drawing another king at the second draw when the first drawn king is not replaced, are two dependent events. In the first event there are four kings in a pack of 52 cards and in the second event there are only three kings left in the pack of remaining 51 cards
Notation.
Sample space : S Sample point: E1, E2, . . . etc. Event: A,B,C,D,E etc. (any capital letter). Venn diagram: Example. S = {E1, E2, . . ., E6}. That is S = {1, 2, 3, 4, 5, 6}. We may think of S as representation of possible outcomes of a throw of a die.
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Venn Diagram A:Candidates over 3 years experience B:Candidates with post graduate qualification S
AB
B
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More definitions
Union, Intersection and Complementation Given A and B two events in a sample space S. 1. The union of A and B, AUB, is the event containing all sample points in either A or B or both. Sometimes we use A or B for union. 2. The intersection of A and B, AB, is the event containing all sample points that are both in A and B. Sometimes we use AB or A and B for intersection. 3. The complement of A, the event containing all sample points that are not in A. Sometimes we use not A or Ac for complement. Mutually Exclusive Events (Disjoint Events) 4 Two events are said to be mutually exclusive (or disjoint) if their intersection is empty. (i.e. A B = ).
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Example
Suppose S = {E1, E2, . . ., E6}. Let A = {E1, E3, E5}; B = {E1, E2, E3}. Then (i)A U B = {E1, E2, E3, E5}. (ii) A B = {E1, E3}. (iii) = {E2, E4, E6}; Bc ={E4, E5, E6}; (iv) A and B are not mutually exclusive (why?) (v) Give two events in S that are mutually exclusive.
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Probability of an event
Relative Frequency Definition If an experiment is repeated a large number, n, of times and the event A is observed nA times, the probability of A is P(A) = nA / n Interpretation n = # of trials of an experiment nA = frequency of the event A nA/n = relative frequency of A P(A) = nA /n , if n is large enough.
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Exercise
If 80% Company guests visit the HO, 70% visit the Plant, and 60% visit both, what is the chance that a guest will visit HO or Plant or both? What is the probability that he will visit neither the HO nor the Plant, but meet Company Executives at the Taj?
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Solution
P(A)=0.8 P(B)=0.7 P(A&B)=0.6 Prob that a guest will visit HO or Plant or both = P(A&B)=0.8 + 0.7 0.6=0.9 = 90% Prob that he will visit neither the HO nor the Plant, but meet Company Executives at the Taj = 1 - Prob that a guest will visit HO or Plant or both = 1 0.9 = 0.1 = 10%
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Conceptual Definition of Probability Consider a random experiment whose sample space is S with sample points E1, E2, . . . ,. For each event Ei of the sample space S let P(Ei) be the probability of Ei (i) 0 P(Ei) 1 for all i (ii) P(S) = 1 (iii)P(Ei) = 1,where the summation is over all sample points in S.
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Example
Definition The probability of any event A is equal to the sum of the probabilities of the sample points in A. Example. Let S = {E1, . . ., E10}.
Ei E1 E2 E3 E4 E5 E6 E7 E8 E9 E10
P(Ei) 1/20 1/20 1/20 1/20 1/20 1/20 1/5 1/5 1/5 1/10
Question: Calculate P(A) where A = {Ei, i6}. P(A) = P(E6) + P(E7) + P(E8) + P(E9) + P(E10) = 1/20 + 1/5 + 1/5 + 1/5 + 1/10 = 0.75
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Steps in calculating probabilities of events 1. Define the experiment 2. List all simple events 3. Assign probabilities to simple events 4. Determine the simple events that constitute the given event 5. Add up the simple events probabilities to obtain the probability of the given event Example Calculate the probability of observing one H in a toss of two fair coins. Solution. S = {HH,HT,TH, TT} A = {HT, TH} P(A) = 0.5
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Example.
Example. Toss a fair coin 3 times. (i) List all the sample points in the sample space Solution: S = {HHH, TTT} (Complete this) (ii) Find the probability of observing exactly two heads and at most one head.
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Probability Laws
Complementation law: P(A) = 1 - P() Additive law: P(A U B) = P(A) + P(B) - P(A B) Moreover, if A and B are mutually exclusive, then P(AB) = 0 and P(A U B) = P(A) + P(B) Multiplicative law (Product rule) P(A B) = P(A|B)P(B) = P(B|A)P(A) Moreover, if A and B are independent P(AB) = P(A)P(B)
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Example
Let S = {E1, E2, . . ., E6}; A = {E1, E3, E5}; B = {E1, E2, E3}; C = {E2, E4, E6};D ={E6}. Suppose that all elementary events are equally likely. (i) What does it mean that all elementary events are equally likely? (ii) Use the complementation rule to find P(Ac). (iii) Find P(A|B) and P(B|A) (iv) Find P(D) and P(D|C) (v) Are A and B independent? Are C and D independent? (vi) Find P(A B) and P(A UB).
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Bayes Law
Let A,Ac be complementary events and let B denote an arbitrary event. Then P(A|B)= P(AB)/P(B ) P(B/A)P(A) P(A|B) =- --------------------------------P(B/A)P(A) + P(B/Ac)P(Ac) Remarks. (i) The events of interest here are A, Ac, (ii) P(A) and P (Ac) are called prior probabilities, (iii) P(A|B) and P(Ac|B) are called posterior (revised) probabilities. (iv) Bayes Law is important in several fields of applications.
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Bayesian Approach
English mathematician Thomas Bayes (1702-61) set out his theory of probability It is being revived now 250 years later Step ahead from Subjective Prob Method A: Digestive disorder, B: Drinking Coke Bayes Rule: P(B|A) P(A) 0.65x0.3 P(A|B) = ------------------- = ----------- = 0.53 P(B) 0.37
BayesTheorom
From the data collected from the OPD of a big hospital, it is known that 30% of the patients suffer from digestive disorder . Furthermore, it is known that 65% of the patients who suffer from digestive disorder drink coke regularly. However, of the patients who do not suffer from digestive disorder 25% drink coke regularly. Find out the following probabilities. 1. A person suffers from digestive disorder given that he /she drinks coke. 2.A person suffers from digestive disorder given that he does not drink coke.
Define the following events A1: A person suffers from digestive disorder A2: A person does not suffer from digestive disorder B: A person drinks coke regularly
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P(Ai)
Prior Probabilities
P(A1)=0.30
P(B/A1)=0.65
P(A2)=0.70
P(B/A2)=0.25
A machine is used in a production process. From past data, it is known that 97% of the time the machine is set up correctly. Furthermore, it is known that if the machine is set up correctly, it produces 95% acceptable (nondefective) items. However, when it is set up incorrectly, it produces only 40% acceptable items.
a. An item from the production line is selected. What is the probability that the selected item is non-defective? b. Given that the selected item is non-defective, what is the probability that the machine is set up correctly?
Define the following events A1: A machine is set up correctly A2: A machine is not set up correctly B: An item selected is non defective
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P(AiB)
P(Ai/B)
Joint Probabilities
Posterior Probabilities
P(A1B)=0.9215
P(A1/B)=.9215/.9335 =.987
P(A2B)=0.012
P(A2/B)=.012/.9335=.0129
General BayesTheorom
A1,A2,..Ak are k mutually exclusive and exhaustive events with known prior probabilities P(A1),P(A2),.P(Ak) B is an event that follows or is caused by prior events A1,A2, Ak with Conditional probabilities P(B/A1),P(B/A2),P(B/Ak) which are known Bayes formula allows us to calculate posterior (revised) probabilities P(A1/B),P(A2/B),.P(Ak/B)
P(Ai/B)=P(Ai)P(B/Ai)/{P(A1)P(B/A1)++P(Ak)P(B/Ak)}
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Examples.
(i) Toss two coins: mn = 22 = 4 (ii) Throw two dice: mn = 6 6 = 36 (iii) A small community consists of 10 men, each of whom has 3 sons. If one man and one of his sons are to be chosen as father and son of the year, how many different choices are possible? Solution: Let the choice of the man as the outcome of the first experiment and the subsequent choice of one of his sons as the outcome of the second experiment, we see,from the basic principle, that there are 10 3 = 30 possible choices.
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If r experiments that are to be performed are such that the first one may result in any of n1 possible outcomes, and if for each of these n1 possible outcomes there are n2 possible outcomes of the second experiment, and if for each of the possible outcomes of the first two experiments there are n3 possible outcomes of the third experiment, and so on,. . ., then there are a total of n1 x n2 xnr possible outcomes of the r experiments.
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Examples
(i) There are 5 routes available between A and B; 4 between B and C; and 7 between C and D. What is the total number of available routes between A and D? Solution: The total number of available routes is mnt = 5.4.7 = 140. (ii) A college planning committee consists of 3 freshmen, 4 parttimers, 5 juniors and 2 seniors. A subcommittee of 4, consisting of 1 individual from each class, is to be chosen. How many different subcommittees are possible? Solution: It follows from the generalized principle of counting that there are 3452 = 120 possible subcommittees.
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Examples (iii) How many different 7-place license plates are possible if the first 3 places are to be occupied by letters and the final 4 by numbers? Solution: It follows from the generalized principle of counting that there are 26 26 26 10 10 10 10 = 175, 760, 000 possible license plates. (iv) In (iii), how many license plates would be possible if repetition among letters or numbers were prohibited? Solution: In this case there would be 26 25 24 10 9 8 7 = 78, 624, 000 possible license plates.
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Combinations
Combinations For r n, we define nCr =n! / (n - r)! r! and say that n and r represents the number of possible combinations of n objects taken r at a time (with no regard to order). Examples (i) A committee of 3 is to be formed from a group of 20 people. How many different committees are possible? Solution: There are 20C3 = 20! /3!17! = 20.19.18/3.2.1 = 1140 possible committees. (ii) From a group of 5 men and 7 women, how many different committees consisting of 2 men and 3 women can be formed? Solution: 5C2 x 27C3 = 350 possible committees.
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Random Sampling
Definition. A sample of size n is said to be a random sample if the n elements are selected in such a way that every possible combination of n elements has an equal probability of being selected .In this case the sampling process is called simple random sampling. Remarks. (i) If n is large, we say the random sample provides an honest representation of the population. (ii) For finite populations the number of possible samples of size n is NCn For instance the number of possible samples when N = 28 and n = 4 is 28C4=20475 Tables of random numbers may be used to select random samples.
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Frequency Distribution:
Number of Sales Orders Booked by 50 Sales Execs April 2006
Number of Orders
Number of SEs
00 04 05 - 09 10 14 15 19 20 24 25 29 30 34 35 39 40 44 TOTAL
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14 19 07 04 02 01 02 00 01 50
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Probability Distribution
Number of Orders Number of SEs Probability
00 04 05 - 09 10 14 15 19 20 24 25 29 30 34 35 39 40 44 TOTAL
14 19 07 04 02 01 02 00 01 Varsha Varde 50
0.28 0.38 0.14 0.08 0.04 0.02 0.04 0.00 0.02 1.00
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