Lecture 13. Understanding Probability and Long-Term Expectations
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1 Lecture 13 Understanding Probability and Long-Term Expectations
2 Thinking Challenge What s the probability of getting a head on the toss of a single fair coin? Use a scale from 0 (no way) to 1 (sure thing). So toss a coin twice. Do it! Did you get one head & one tail? What s it all mean?
3 Probability as long term relative frequency
4 What about Probability? The foundation of Probability theory lies in problems associated with gambling and games of chance The Romans used played a game with ASTRAGALI - Heel bones of animals
5 DICE DICE as we know them were invented around 300 BC
6 I lied, cheated and stole to become a millionaire. Now anybody at all can win the lottery and become a millionaire
7 LOTTO 6/42 What are the chances of winning with one selection of 6 numbers? Matches Odds 6 1 in 5,245, in 24, in 555
8 LOTTO 6/42 The average time to win each of the prizes is given by: Match 3 with Bonus 2 Years, 6 Weeks Match 4 2 Years, 8 Months Match Years, 9 Months Match 5 with Bonus 4323 Years, 5 Months Share in Jackpot 25,220 Years
9 Why do people still play the lottery? If you re not in you can t win! You never know your luck until you try! My chances of winning a million are better than my chances of earning a million. The lottery is a tax on the statistically challenged.
10 Thought Question 1: Two very different queries about probability: a. If you flip a coin and do it fairly, what is the probability that it will land heads up? b. What is the probability that you will eventually own a home; that is, how likely do you think it is? (If you already own a home, what is the probability that you will own a different home within the next 5 years?) For which question was it easier to provide a precise answer? Why?
11 Thought Question 2: Explain what it means for someone to say that the probability of his or her eventually owning a home is 70%.
12 Thought Question 3: Explain what s wrong with this partial answer to Thought Question 1: The probability that I will eventually own a home, or of any other particular event happening, is 1/2 because either it will happen or it won t.
13 Thought Question 4: Why do you think insurance companies charge young men more than they do older men for automobile insurance, but charge older men more for life insurance?
14 Thought Question 5: How much would you be willing to pay for a ticket to a contest in which there was a 1% chance that you would win $500 and a 99% chance that you would win nothing? Explain your answer.
15 16.1 Probability What does the word probability mean? Two distinct interpretations: For the probability of winning a lottery based on buying a single ticket -- we can quantify the chances exactly. For the probability that we will eventually buy a home -- we are basing our assessment on personal beliefs about how life will evolve for us.
16 16.2 The Relative-Frequency Interpretation Relative-frequency interpretation: applies to situations that can be repeated over and over again. Examples: Buying a weekly lottery ticket and observing whether it is a winner. Commuting to work daily and observing whether a certain traffic signal is red when we encounter it. Testing individuals in a population and observing whether they carry a gene for a certain disease. Observing births and noting if baby is male or female.
17 Idea of Long-Run Relative Frequency Probability = proportion of time it occurs over the long run Long-run relative frequency of males born in the United States is about (Information Please Almanac, 1991, p. 815) Possible results for relative frequency of male births: Proportion of male births jumps around at first but starts to settle down just above.51 in the long run.
18 Determining the Probability of an Outcome Method 1: Make an Assumption about the Physical World Example: assume coins made such that they are equally likely to land with heads or tails up when flipped. probability of a flipped coin showing heads up is ½. Method 2: Observe the Relative Frequency Example: observe the relative frequency of male births in a given city over the course of a year. In 1987 there were a total of 3,809,394 live births in the U.S., of which 1,951,153 where males. probability of male birth is 1,951,153/3,809,394 =
19 Summary of Relative-Frequency Interpretation of Probability Can be applied when situation can be repeated numerous times and outcome observed each time. Relative frequency should settle down to constant value over long run, which is the probability. Does not apply to situations where outcome one time is influenced by or influences outcome the next time. Cannot be used to determine whether outcome will occur on a single occasion but can be used to predict long-term proportion of times the outcome will occur.
20 16.3 The Personal-Probability Interpretation Person probability: the degree to which a given individual believes the event will happen. They must be between 0 and 1 and be coherent. Examples: Probability of finding a parking space downtown on Saturday. Probability that a particular candidate for a position would fit the job best.
21 16.4 Applying Some Simple Probability Rules Rule 1: If there are only two possible outcomes in an uncertain situation, then their probabilities must add to 1. Example 1: If probability of a single birth resulting in a boy is 0.51, then the probability of it resulting in a girl is 0.49.
22 Simple Probability Rules Rule 2: If two outcomes cannot happen simultaneously, they are said to be mutually exclusive. The probability of one or the other of two mutually exclusive outcomes happening is the sum of their individual probabilities. Example 5: If you think probability of getting an A in your statistics class is 50% and probability of getting a B is 30%, then probability of getting either an A or a B is 80%. Thus, probability of getting C or less is 20% (using Rule 1).
23 Simple Probability Rules Rule 3: If two events do not influence each other, and if knowledge about one doesn t help with knowledge of the probability of the other, the events are said to be independent of each other. If two events are independent, the probability that they both happen is found by multiplying their individual probabilities. Example 7: Woman will have two children. Assume outcome of 2 nd birth independent of 1 st and probability birth results in boy is Then probability of a boy followed by a girl is (0.51)(0.49) = About a 25% chance a woman will have a boy and then a girl.
24 Simple Probability Rules Rule 4: If the ways in which one event can occur are a subset of those in which another event can occur, then the probability of the subset event cannot be higher than the probability of the one for which it is a subset. Example 10: Suppose you are 18 and speculating about your future. You decide the probability you will eventually get married and have children is 75%. By Rule 4, probability that you will eventually get married is at least 75%.
25 16.5 When Will It Happen? Probability an outcome will occur on any given instance is p. Probability the outcome will not occur is (1 p). Outcome each time is independent of outcome all other times. Probability it doesn t occur on 1 st try but does occur on 2 nd try is (1 p)p.
26 Example 11: Number of Births to First Girls Probability of a birth resulting in a boy is about.51, and the probability of a birth resulting in a girl is about.49. Suppose couple will continue having children until have a girl. Assuming outcomes of births are independent of each other, probabilities of having the first girl on the first, second, third, fifth, and seventh tries are shown below.
27 Accumulated Probability Probability of 1 st occurrence not happening by occasion n is (1 p) n. Probability 1 st occurrence has happened by occasion n is [1 (1 p) n ]. Example 12: Getting Infected with HIV Suppose probability of infected is 1/500 = Probability of not infected is So probability of infection by 2 nd encounter is [1 ( ) 2 ] =
28 16.6 Long-Term Gains, Losses, and Expectations Long-Term Outcomes Can Be Predicted Example 14: Insurance Policies A simple case: All customers charged $500/year, 10% submit a claim in any given year and claims always for $1500. How much can the company expect to make per customer? Average Gain =.90 ($500).10 ($1000) = $350 per customer
29 Expected Value (EV) EV = expected value = A 1 p 1 + A 2 p 2 + A 3 p A k p k where A 1, A 2, A 3,, A k are the possible amounts and p 1, p 2, p 3,, p k are the associated probabilities. Example 14, continued: A 1 p 1 + A 2 p 2 = (.10)( $1000) + (.90)($500) = $350 = expected value of company s profit per customer. Key: Expected value is the average value per measurement over the long run and not necessarily a typical value for any one occasion or person.
30 Example 15: California Decco Lottery Game Decco: player chooses one card from each of four suits. A winning card drawn from each suit. Prizes awarded based on the number of matches. Cost to play = $1. EV = ($4999)(1/28,561) + ($49)(1/595) + ($4)(.0303) + ( $1)(.726) = $0.35 Over many repetitions, players will lose an average of 35 cents per play. The Lottery Commission will only pay out about 65 cents for each $1 ticket sold.
31 Expected Value as Mean Number If measurement taken over a large group of individuals, the expected value can be interpreted as the mean value per individual. Example: Suppose 40% of people in a population smoke a pack of cigarettes a day (20 cigarettes) and remaining 60% smoke none. Expected number of cigarettes smoked per day by one person: EV = (0.40)(20 cigarettes) + (0.60)(0 cigarettes) = 8 cigarettes On average 8 cigarettes are smoked per person per day. Here again, the EV is not a value we actually expect to measure on any one individual.
32 Example: Consider a lottery game where you pay $1 to play and have the following chances of winning certain prizes. What is the expected value of this game? Prize Net Gain Probability $0.00 -$ $1.00 $ $10.00 $ $ $ Answer: EV= (-$1)(0.7) + ($0)(0.25) +($9)(0.049) + (99)(0.001) = -$0.16 This result tells us that over many repetitions of the game, you will lose an average of 16 cents per game.
33 Roulette Gamble What is the EV of betting $1 on black 13 in Roulette?
34 Roulette Gamble What is the EV of betting $1 on black 13 in Roulette? Outcome Probability of $ Payoff occurrence 13 1/38 $35 Not 13 37/38 $-1
35 Roulette Gamble What is the EV of betting $1 on black 13 in Roulette? ($35 * 1/38) + ($-1 * 37/38) = $ Each time you place a bet on the roulette table you should expect to lose 5.26%.
36 Case Study 16.1: Birthdays and Death Days Is There a Connection? Study Details: Data from death certificates of adults in California who died of natural causes between 1979 and Each death classified as to how many weeks after the birthday it occurred. Compared actual numbers of deaths to expected number (seasonally adjusted). Results: Women: biggest peak in Week 0; highest number of women died the week after their birthdays. Men: biggest peak was in Week 51; highest number of men died the week before their birthdays. Probability biggest peak for women in Week 0 AND biggest peak for men in Week 51 = (1/52)(1/52) = Source: Phillips, Van Voorhies, and Ruth, 1992
37 For Those Who Like Formulas
38 We re ready to play some games
39 An Example Experiment: Roll Two Dice Possible Outcomes: Any number from 1 to 6 can appear on each die. There are 36 possible outcomes Each Outcome in the Sample Space is equally probable. So the probability of each outcome is 1/36 What is the probability of the Event - get combined total of 7 on the dice
40 (1,1) (1,2) (1,3) (1,4) (1,5) (1,6) (2,1) (2,2) (2,3) (2,4) (2,5) (2,6) (3,1) (3,2) (3,3) (3,4) (3,5) (3,6) (4,1) (4,2) (4,3) (4,4) (4,5) (4,6) (5,1) (5,2) (5,3) (5,4) (5,5) (5,6) (6,1) (6,2) (6,3) (6,4) (6,5) (6,6) (6,1 ) (5,2 ) (4,3 ) (3,4 ) (2,5 ) (1,6 )
41 Lets Play a Game html
42 The Monty Hall Problem Let s Make A Deal: a game show back in 90 s. A player is given the choice of three doors. Behind one door is the Grand Prize (a car and a cruise); behind the other two doors, booby prizes (stinking pigs). The player picks a door, and the host peeks behind the doors and opens one of the rest of the doors. There is a booby prize behind the open door. The host offers the player either to stay with the door that was chosen at the beginning, or to switch to the remaining closed door. Which is better: to switch doors or to stay with the original choice? What are the chances of winning in either case?
43 Let s Make a Deal! Assume your are a contestant on this game show. There are three doors: 1 2 3
44 Let s Make a Deal! You have been asked to select one of these three doors
45 Let s Make a Deal! Behind one of the doors is the grand prize! 1
46 Let s Make a Deal! Behind one of the doors is the booby prize! 2
47 Let s Make a Deal! Now assume you have selected Door # 1. Monty Hall (the host) will now open one of the other doors (door # 2 or 3) and show you the prize behind that door (it won t be the grand prize).
48 Let s Make a Deal! He will now ask you whether you would like to keep your original selection (Door #1) or switch to the other unopened door (Door # 2 or 3). Should you switch?
49 Let s Make a Deal! Marilyn vos Savant - When you first choose door No. 1 from among the three, there s a 1/3 chance that the prize is behind that one and a 2/3 chance that it s behind one of the others. But then the host steps in and gives you a clue. If the prize is behind No. 2, the host shows you No. 3; and if the prize is behind is behind No. 3, the host shows you No. 2. So when you switch, you win if the prize is behind No. 2 or No. 3. YOU WIN EITHER WAY! But if you don t switch, you win only if the prize is behind door No. 1.
50 Let s Make a Deal! Grand Prize You choose: Host Opens: You Switch Result Is In: To: or 3 2 or 3 Lose Win Win Win or 3 1 or 3 Lose Win Win Win or 2 1 or 2 Lose
51 Let s Make a Deal! You lose in 3/9 cases - p(lose) = 1/3 You win in 6/9 cases - p(win) = 2/3.
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