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**Statistics and Data Analysis**

Part 3 – Probability

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**Counting Rule for Probabilities**

9/52 Counting Rule for Probabilities Probabilities for compounds of atomistic equally likely events are obtained by counting. P(Compound Event) =

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10/52 Compound Events E = A Random consumer’s random choice of exactly one product Event(fruit) = Event(berry #3) + Event(fruity #6) + Event(apple #8) P(Fruity) = P(#3) + P(#6) + P(#8) = 1/8 + 1/8 + 1/8 = 3/8 P(Sweetened) = P(HoneyNut #2) + P(Frosted #7) = 1/8 + 1/8 = 1/4

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**Appplications: Games of Chance; Poker**

20/52 Appplications: Games of Chance; Poker In a 5 card hand from a deck of 52, there are 52*51*50*49*48)/(5*4*3*2*1) different possible hands. (Order doesn’t matter). 2,598,960 possible hands. How many of these hands have 4 aces? 48 = the 4 aces plus any of the remaining 48 cards.

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21/52 Probability of 4 Aces

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22/52 The Dead Man’s Hand The dead man’s hand is 5 cards, 2 aces, 2 8’s and some other 5th card (Wild Bill Hickok was holding this hand when he was shot in the back and killed in 1876.) The number of hands with two aces and two 8’s is = 1,584 The rest of the story claims that Hickok held all black cards (the bullets). The probability for this hand falls to only 44/ (The four cards in the picture and one of the remaining 44.) Some claims have been made about the 5th card, but noone is sure – there is no record.

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**Counting the Dead Man’s Cards**

23/52 Counting the Dead Man’s Cards The Aces 6: There are 6 possible pairs out of [A♠ A♣ A♥ A♦] (♠ ♣) (♠♥) (♠♦) (♣♥) (♣♦) (♥♦) The 8’s: There are also 6 possible pairs out of [8♠ 8♣ 8♥ 8♦] There are 44 remaining cards in the deck that are not aces and not 8’s. The total number of possible different hands is therefore 6(6)(44) = 1,584. If he held the bullets (black cards), then there are only (1)(1)(44) = 44 combinations. There is a claim that the 5th card was a diamond. This reduces the number of possible combinations to (1)(1)(11).

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**Poker Hands Royal Flush – Top 5 cards in a suit**

24/52 Poker Hands Royal Flush – Top 5 cards in a suit 4 of a kind – plus any other card Straight Flush – 5 sequential cards in the same suit suit Full House – 3 of one kind, 2 of another. (Also called a “boat.”)

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**More Poker Hands Flush – 5 cards in a suit, not sequential**

25/52 More Poker Hands Flush – 5 cards in a suit, not sequential 3 of a kind plus two other cards Straight – 5 cards in a numerical row, not the same suit Two pairs plus one other card

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**Still More Poker Hands 1 pair plus 3 other cards**

26/52 Still More Poker Hands 1 pair plus 3 other cards High card: 5 cards, no pairs, mixed suits

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**Probabilities of 5 Card Poker Hands**

27/52 Probabilities of 5 Card Poker Hands Poker Hand Different Combinations Probability Odds Against Royal Straight Flush 4 ,729:1 Other Straight Flush 36 ,193:1 Straight Flush (Royal or other) ,973:1 Four of a kind 624 ,164:1 Full House 3,744 :1 Flush 5,108 :1 Straight 10,200 :1 Three of a kind 54,912 :1 Two Pairs 123,552 :1 One Pair 1,098,240 :1 High card only (None of above) 1,302,540 :1 Total 2,598,960

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28/52 Odds (Ratios)

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**Odds vs. 5 Card Poker Hands**

29/52 Odds vs. 5 Card Poker Hands Poker Hand Combinations Probability Odds Against Royal Straight Flush 4 ,729:1 Other Straight Flush 36 ,193:1 Straight Flush (Royal or other) ,973:1 Four of a kind 624 ,164:1 Full House 3,744 :1 Flush 5,108 :1 Straight 10,200 :1 Three of a kind 54,912 :1 Two Pairs 123,552 :1 One Pair 1,098,240 :1 High card only (None of above) 1,302,540 :1 Total 2,598,960

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**Joint Events Pairs (or groups) of events: A and B**

30/52 Joint Events Pairs (or groups) of events: A and B One or the other occurs: A or B ≡ A B Both events occur A and B ≡ A B Independent events: Occurrence of A does not affect the probability of B An addition rule: P(A B) = P(A)+P(B)-P(A B) The product rule for independent events: P(A B) = P(A)P(B)

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**Joint Events: Pick a Card, Any Card**

31/52 Joint Events: Pick a Card, Any Card Event A = Diamond: P(Diamond) = 13/52 2♦ 3♦ 4♦ 5♦ 6♦ 7♦ 8♦ 9♦ 10♦ J♦ Q♦ K♦ A♦ Event B = Ace: P(Ace) = 4/52 A♦ A♥ A♣ A♠ Event A or B = Diamond or Ace P(Diamond or Ace) = P(Diamond) + P(Ace) – P(Diamond Ace) = 13/52 + 4/52 – 1/52 = 16/52

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32/52 Application Survey of German Individuals over 5 years Frequency in black, sample proportion in red. E.g., =1144/27326, =14243/27326 Female Male Total Uninsured 1144 .04186 1979 .07242 3123 .11429 Insured 11939 .43691 12264 .44880 24203 .88571 13083 .47877 14243 .52123 27326

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**The Addition Rule - Application**

33/52 The Addition Rule - Application Survey of German Individuals over 5 years Female Male Total Uninsured 1144 .04186 1979 .07242 3123 .11429 Insured 11939 .43691 12264 .44880 24203 .88571 13083 .47877 14243 .52123 27326 An individual is drawn randomly from the sample of 27,326 observations. P(Female or Insured) = P(Female) + P(Insured) – P(Female and Insured) = =

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**Product Rule for Independent Events**

34/52 Product Rule for Independent Events If two events A and B are independent, the probability that both occur is P(A B) = P(A)P(B) Example: I will fly to Washington (and back) for a meeting on Monday. I will use the train on Tuesday P(Late if I fly) = P(Late if I take the train)=.2. Late or on time for the two days are independent. What is the probability that I will miss at least one meeting? P(Late Monday, Not late on Tuesday) = .6(.8) = .48 P(Not late Monday, Late Tuesday) = .4(.2) = .08 P(Late Monday and Late Tuesday) = .6(.2) = .12 P(Late at least once) = = .68

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**Joint Events and Joint Probabilities**

35/52 Joint Events and Joint Probabilities Marginal probability = Probability for each event, without considering the other. Joint probability = Probability that two (several) events happen at the same time

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**Marginal and Joint Probabilities**

36/52 Marginal and Joint Probabilities Survey of German Individuals over 5 years Consider drawing an individual at random from the sample. Female Male Total Uninsured 1144 .04186 1979 .07242 3123 .11429 Insured 11939 .43691 12264 .44880 24203 .88571 13083 .47877 14243 .52123 27326 Marginal Probabilities; P(Male)=.52123, P(Insured) = Joint Probabilities; P(Male and Insured) =

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**Conditional Probability**

37/52 Conditional Probability “Conditional event” = occurrence of an event given that some other event has occurred. Conditional probability = Probability of an event given that some other event is certain to occur. Denoted P(A|B) = Probability of A will occur given B occurred. Prob(A|B) = Prob(A and B) / Prob(B)

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**Conditional Probabilities**

38/52 Conditional Probabilities Company ESI sells two types of software, Basic and Advanced, to two markets, Government and Academic. Sales occur with the following probabilities: Academic Government Total Basic Advanced Total P(Basic | Academic) = .4 / .7 = .571 P(Government | Advanced) = .1 / .4 = .25

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**Conditional Probabilities**

39/52 Conditional Probabilities P(Uninsured|Female) =P(Uninsured and Female)/P(Female) =.04186/.47877=.08743 P(Male|Insured) =P(Male and Insured)/P(Insured) = /.88571=.50671 An individual is drawn randomly from the sample of 27,326 individuals in the German socioeconomic panel.

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**The Product Rule for Conditional Probabilities**

40/52 The Product Rule for Conditional Probabilities For events A and B, P(A B)=P(A|B)P(B) Example: You draw a card from a well shuffled deck of cards, then a second one. What is the probability that the two cards will be a pair? There are 13 cards. Let A1 be the card on the first draw and A2 be the second one. Then, P(A1 A2) = P(A1)P(A2|A1). For a pair of kings, P(K1) = 1/13. P(K2|K1) = 3/51. P(K1 K2) = (1/13)(3/51). There are 13 possible pairs, so P(Pair) = 13(1/13)(3/51) = 1/17.

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41/52 Independent Events Events are independent if the occurrence of one does not affect probabilities related to the other. Events A and B are independent if P(A|B) = P(A). I.e., conditioning on B does not affect the probability of A.

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**Independent Events? Pick a Card, Any Card**

42/52 Independent Events? Pick a Card, Any Card P(Red card drawn) = 26/52 = 1/2 P(Ace drawn) = 4/ = 1/13. P(Ace|Red) = (2/52) / (26/52) = 1/13 P(Ace) = P(Ace|Red) so “Red Card” and “Ace” are independent.

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43/52 Independent Events? Company ESI sells two types of software, Basic and Advanced, to two markets, Government and Academic. Sales occur randomly with the following probabilities: Academic Government Total Basic Advanced Total P(Basic | Academic) = .4 / .7 = not equal to P(Basic)=.6 P(Government | Advanced) = .1 / .4 = not equal to P(Govt) =.3

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**Litigation Risk Analysis**

44/52 Litigation Risk Analysis P(Outcome | Decision) Decision P(Result | Outcome,Decision=L) Decision Tree.pdf#search=%22%22litigation risk%22%2Bgilchrist%22

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45/52 Litigation Risk If we decide to LITIGATE, the probability we will PREVAIL and FIND ASSET is P(Prevail,Find Asset) = P(Find Asset|Prevail) P(Prevail) = .5 * .5 = .25.

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**Litigation Risk Analysis: Using Probabilities to Determine a Strategy**

46/52 Litigation Risk Analysis: Using Probabilities to Determine a Strategy Two paths to a favorable outcome. Probability = (upper) .7(.6)(.4) + (lower) .5(.3)(.6) = = .258. How can I use this to decide whether to litigate or not?

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**Using Conditional Probabilities: Bayes Theorem**

47/52 Using Conditional Probabilities: Bayes Theorem

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48/52 Using Bayes Theorem If I choose a cookie from Bowl #1, the probability it is chocolate chip is P(CC|#1) = P(CC and #1)/P(#1) = / .5 = = 1/4 If you give me a chocolate chip cookie, what is the probability it came from Bowl #1? P(#1|CC) = P(CC|#1)P(#1)/P(CC) = (1/4)(1/2)/(3/8) = 1/3 Example from

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49/52 Drug Testing Data P(Test correctly indicates disease)=.98 (Sensitivity) P(Test correctly indicates absence)=.95 (Specificity) P(Disease) = (Fairly rare) Notation + = test indicates disease, – = indicates no disease D = presence of disease, N = absence of disease Data: P(D) = (Incidence of the disease) P(+|D) = (Correct detection of the disease) P(–|N) = (Correct failure to detect the disease) What are P(D|+) and P(N|–)? Note, P(D|+) = the probability that a patient actually has the disease when the test says they do.

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50/52 More Information Deduce: Since P(+|D)=.98, we know P(–|D)=.02 because P(-|D)+P(+|D)=1 [P(–|D) is the P(False negative). Deduce: Since P(–|N)=.95, we know P(+|N)=.05 because P(-|N)+P(+|N)=1 [P(+|N) is the P(False positive). Deduce: Since P(D)=.005, P(N)=.995 because P(D)+P(N)=1.

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51/52 Now, Use Bayes Theorem

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**Summary Randomness and decision making Probability**

52/52 Summary Randomness and decision making Probability Sources Basic mathematics (the axioms) Simple and compound events and constructing probabilities Joint events Independence Addition and product rules for probabilities Conditional probabilities and Bayes theorem

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