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lect8v4_1up

# lect8v4_1up - Stat 104 Quantitative Methods for Economists...

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Stat 104: Quantitative Methods for Economists Class 8: Introduction to Probability, Part I 1

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What is probability ? square6 Probability is a measure of uncertainty. square6 We can try to compute the probability of almost any event of interest. square6 An even t is the basic element to which 2 probability can be applied; it is the result of an observation or experiment, or the description of some potential outcome.
Some examples of events Example events we can assign probability to: square6 Getting a head when we flip a coin square6 Coca-Cola stock rises 5% next week 3 square6 Ford will produce a hybrid SUV that gets 50mpg by 2012. What are some additional events you could define for the above scenarios ?

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Probability is important Probability is useful to study since uncertainty plays a major role in economic decisions: square6 Will our new product be successful ? 4 square6 How many yen will a dollar buy in currency markets a month from today? square6 Will the manufactured part be defective ? square6 Given you took a test drive, will you buy the car ?
Most people don’t get probability square6 Unfortunately, most people do not attempt to evaluate probability in a quantitative way. Instead, they rely on intuition, doubtful logic, misinterpreted experience, and emotion. square6 As the famous American jurist, Oliver Wendell 5 Holmes, put it: Most people think dramatically, not quantitatively. square6 This section should help you start thinking about probability (uncertainty) in a clearer fashion and hence make more informed decisions.

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Values of probabilities square6 We denote the probability of the event A as Prob(A), which we often abbreviate as Pr(A) or simply P(A). square6 The probability of the event A is the chance that A will occur. Hence probabilities range from 0 (no chance of occurrence) to 1 (absolute chance of 6 occurrence (a sure thing)).
How is Probability Interpreted ? 0 1 7 Name some events that would go here Name some events that would go here Name some events that would go here Name some events that would go here

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The Birthday Problem Sometimes the results of using probability theory are surprising (to me at least). Suppose we have n people in a room (randomly selected, i.e. no twins). What is the probability that at least 2 people have the same birthday ? 8 n Prob(at least 2 people have same birthday) 15 25 40 50 70
By the Way, How is Probability Defined? square6 We all know that the probability of getting a head when I flip a coin is 0.5. square6 What about the probability of a 35 year old white male who hasn’t smoked in 10 years of being diagnosed with lung cancer this year ? square6 Where do probabilities come from ? 9

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Three “Types” of Probability square6 There are three basic ways of classifying probability. These three represent rather different conceptual approaches to the study of probability theory; in fact, experts disagree about which approach is the proper one to use. The three approaches are boxshadowdwn 1) Classical Approach boxshadowdwn 2) Relative Frequency Approach boxshadowdwn 3) Subjective Approach 10
But the rules are the same……..

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