Quantitative Techniques

COQTA1-B33

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 What will be
covered in today’s
lesson?
Probability
Distributions
Week 3
Lesson 1 Binomial Probability
Distributions

Poisson Probability
Distributions
INTRODUCTION

A probability distribution is a list of all the possible outcomes of a

random variable and their associated probabilities of occurrence.

Probability distributions quantify the uncertain behavior of many

random variables in business practice.
Week 3: Lesson
1
What is a probability distribution

• Statistical function
• Dispersion of values of a random variable
• Distribution bounded between lowest and highest values
⚫ p(x) ≥ 0 for all values of x
⚫ p(x) = 1

Precise location depends on:

• Mean
• Standard Deviation
• Skewness
TYPES OF PROBABILITY DISTRIBUTION

Probability distribution functions can be classified as discrete or

continuous

The choice of a particular probability distribution function in practice depends on the data type of
the random variable (i.e. discrete or continuous) under study.
Week 3: Lesson 1
Discrete probability distributions
Recall: A discrete random variable can take a countable number of values.
e.g. Number of students in a class

Discrete probability distributions assume that the outcomes of a

random variable under study can take on only specific (usually
integer) values
• Discrete outcomes (coin flip, roll a dice)
• Only be measured on specific values
• Overall probability is 1
Two common discrete probability distribution functions

Two common discrete probability distribution functions are the binomial

probability distribution and the Poisson probability distribution

BINOMIAL PROBABILITY
DISTRIBUTION

For a discrete random variable to follow either a

POISSON PROBABILITY
binomial or a Poisson process, it must possess a
DISTRIBUTION
number of specific characteristics
Binomial distribution conditions

A discrete random variable follows the binomial distribution if it satisfies the following four
conditions:

01
The random variable is observed n number of times

There are only two, mutually exclusive and collectively

exhaustive, outcomes associated
02 with the random variable on each object in the sample. These two
outcomes are labelled
success and failure.

Each outcome has an associated probability.

03 – The probability for the success outcome is denoted by p.
– The probability for the failure outcome is denoted by 1 − p.

The objects are assumed to be independent of each other,

meaning that p remains constant for each sampled object (none
04 of trials influence one another)
Week 3: Lesson
1
Binomial Probability Distributions
Week 3: Lesson 1
Binomial Probability Distributions: Class Example

The Zeplin car hire company has a fleet of rental cars that includes
the make Opel. Experience has shown that one in four clients
requests to hire an Opel. If five reservations are randomly selected
from today’s bookings, what is the probability (or likelihood) that two
clients will have requested an Opel?
Class Example: Solution
For this discrete random variable to follow the binomial process, it must satisfy the four conditions
defined above
• Condition 1 is satisfied, since the random variable is observed five times
• Condition 2 is satisfied, since there are only two possible outcomes on each client request
• Condition 3 is satisfied, since the probability of the success outcome is constant and is derived from
the statement that ‘experience has shown that one in four clients request to hire an Opel’
• Condition 4 is satisfied, since the trials are independent.

What is the probability that two out of five clients will request to hire an Opel?’
Find: P(x = 2) when n = 5 and p = 0.25.
Then: P(x = 2) = 5C2(0.25)2 (1 – 0.25)5–2 = (10)(0.0625)(0.4219) = 0.264

Thus there is a 26.4% chance that two out of five randomly selected clients will
request an Opel
Group Activity
Life Assurance Policy Surrender Study
Global Insurance has found that 20% (one in five) of all insurance policies
are surrendered (cashed in) before their maturity date. Assume that 10
policies are randomly selected from the company’s policy database.
a. What is the probability that four of these 10 insurance policies will have
been surrendered before their maturity date?
b. What is the probability that no more than three of these 10 insurance
policies will have been surrendered before their maturity date?
c. What is the probability that at least two out of the 10 randomly selected
policies will be surrendered before their maturity date?

Wegner, 2020 pg. 146

Week 3: Lesson 1
Poisson Probability Distributions

• A Poisson process measures the number of occurrences of a particular

outcome of a discrete random variable in a predetermined time, space or
volume interval for which an average number of occurrences of the outcome
is known or can be determined.
• These are examples of a Poisson process:
• the number of breakdowns of a machine in an eight-hour shift
• the number of cars arriving at a parking garage in a one-hour time interval
• the number of problems identified at the end of a construction project
• the number of typing errors on a page of a newspaper
 The Poisson Distribution
Evaluates the probability of a (usually small) number of occurrences out of many
opportunities in a …
period of time, area, volume, weight, distance and other units of measurement

xe−
P(x) =
x!
= mean number of occurrences in the given unit of
time, area, volume, etc.
⚫ Mean µ = , variance: 2 =

 xe−  x−1e−
E(x) =  x =  = ,
x=0 x! x=1 (x −1)!
  x−2 e − 
E(x 2 − x) = 2  = 2 , Var(x) = .
x=2 (x − 2)!

14
Week 3: Lesson 1
Poisson Probability Distributions
The Poisson Distribution (Example )

Say in a given road there are an average of 3 blue cars per 100 meters.
What is the probability of seeing 5 blue cars in the next 100 meters,
assuming a Poisson distribution?

x −
 e 35 e −3
P(x = 5) =

16
Week 3: Lesson 1
Poisson Probability Distributions: Class activity

A web-based travel agency uses its website to market its travel products
(holiday packages). The agency receives an average of five web-based
enquiries per day for its different travel products.

(a) What is the probability that, on a given day, the agency will receive only three web-based
enquiries for its travel products?
(b) What is the probability that, on a given day, the travel agency will receive at most two
web-based enquiries for travel packages?
(c) What is the probability that the travel agency will receive more than four web-based
enquiries for travel packages on a given day?
(d) What is the probability that the travel agency will receive more than four web-based
enquiries for travel packages in any two-day period?
Wegner, 2020 pg. 149
Week 3: Lesson 1
Binomial VS Poisson Probability Distributions

Use Binomial when:

• Exact probabilities
• Want probability of certain number of events

Use Poisson when:

• Average Probability of when an event will occur

• Probability over a certain period of time
 What will be
covered in today’s
lesson?
Probability Distributions
Week 3
Lesson 2 Normal Z- distribution
Week 3: Lesson 2
Normal Distribution

Empirical Rule:
• Approximation, only works with certain data types
• Probability of values not an integer- area under the curve
• Need to convert every X –value to a standardized number (z-score)-
area under the curve (already calculated)
 Also known as the Gaussian
distribution, the normal distribution
is the most common continuous
distribution used in statistics.

N.D is defined as a probability

distribution that is symmetric about
the mean. This means that the mean,
median, and mode are all equal. The
normal distribution is also bell-
shaped, with most of the data points
clustered around the mean and
fewer data points further away from
the mean (Holmes, Illowsky and
Dean, 2017).

Many real-life random variables such

Concept of Normal as height, weight, and other physical
characteristics, scores on various

Distribution tests follow this distribution, at least

approximately.
 Variables of a Normal Distribution

Features of the Normal Distribution includes only two population parameters, the mean, μ and variance, σ2

The mean μ tells you about location -

Increase μ - Location shifts right
Decrease μ – Location shifts left
Shape is unchanged
The variance σ2 tells you about narrowness or flatness of the bell -
Increase σ2 - Bell flattens. Extreme values are more likely
Decrease σ2 - Bell narrows. Extreme values are less likely
Location is unchanged
Week 3: Lesson 2
Normal Z- Distribution

Properties:
• µz = 0
• σz = 1
• Z-table gives the probability that z lies between its mean (µz = 0) an a
given upper z-limits
Week 3: Lesson 2
Normal Z- Distribution
Finding Probabilities for x-limits using
the z-distribution
Z-Score is a tool to compute probabilities of intervals of values for X
distributed Normal (μ, σ2).
Each z-score is associated with a probability, or p-value, that tells you
the likelihood of values below that z-score occurring.
If you convert an individual value into a z-score, you can then find the
probability of all values up to that value occurring in a normal
distribution.
Reading from a z-score table
Refer to the z-table to answer the a.
following questions:
From the z-table, identify z = 1.4
Determine: down the left column of z. Then
(a) P(0 < z < 1.46) read across the columns at the
(b) P(z > 1.82) z = 1.4 row until z = 0.06. The area
found at this intersection is
0.4279.
So P(0 < z < 1.46) = 0.4279
 …..cont.
a.
b.
The z-table only gives areas between
the midpoint (z = 0) and an upper z-
limit, k (i.e. between 0 < z < k).
The area above k is found by subtracting
the area between (0 < z < k) from 0.5,
which is the total area above the
midpoint of z = 0.
From the z-table, P(0 < z < 1.82) =
0.4656.
Then P(z > 1.82) = 0.5000 – 0.4656
(Complementary probability rule.)
= 0.0344
Thus there is a 42.79% chance that a z-
value will lie between z = 0 and z = 1.46.
….cont.
Thus there is only a 3.44% chance
that a z-value will lie above z =
1.82.
Week 3: Lesson 2
Normal Z-Distribution

1)0,4279
2)0,48928
3)0,4656
4)0,8887
5)0,0887
 Week 3: Lesson 2
Finding Probabilities or x-limits using z-distribution

Find P( 14 < x < 20) 1) Convert each x-value into a z-value

Mean: 20
SD: 4 2) Read the corresponding areas
under the curve off of the z-table

3) Use z-table to fine P( -1,5 < z <

0)

P (14 < x < 20) = 0,4332

Week 3: Lesson
2
Normal Z- Distribution

1) Draw probability distribution and

indicate the area to be found

2) Convert each x-value into a z-value

3) Calculate probability using z-table

4) Interpret your finding

P (45 < x < 51) = 0,2734

Week 3: Lesson
2
Normal Z- Distribution

1) Draw probability distribution and

indicate the area to be found

2) Convert each x-value into a z-value

P (x < 48)
3) Calculate probability using z-table

4) Interpret your finding

P (x < 48) = 0,6480

Week 3: Lesson 2
Normal Distribution

0,3461

0,1628

0,8051
Week 3: Lesson 1
Application Questions: Probability Distributions
Week 3: Lesson 1
Application Questions: Probability Distributions
Week 3: Lesson 1
Application Questions: Probability Distributions
Week 3: Lesson 1
Conclusion
• Summary
• Ensure you complete lessons and activities on myLMS
• Be well prepared for the next Lecturer-Led session
• If you have any questions on the content or examples on myLMS, please ask during the
next Lecturer-Led session
• Next topic:
• Confidence Intervals