Probability Concepts

BUAD311 Operations Management Session 5

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Quote of the day

Without the element of uncertainty, the bringing off of even the greatest business triumph would be dull, routine, and eminently unsatisfying. -J. Paul Getty

What is Randomness?

Decision Making Under Uncertainty

Noahs Bagel
How many bagels do you want to bake this morning?

Netflix
How many copies of The Kings Speech do you want to buy from the studio?

CBS
What is the right price for a 2 minute ad during Super Bowl 48?
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Distribution function
Every random variable is defined by its distribution function F(x) which is the probability that the outcome of the random variable is less or equal to x Two types of distribution functions:
Discrete: it is (usually) possible to express the set of possible outcomes as a list e.g. the number of students that come to a given lecture: 0, 1, 2, , 50, 51, 52, Continuous: the set of possible outcomes is unlimited and cannot be expressed as a list e.g. the time a sprinter takes to run the 100m dash: anything between 9 and 11 seconds (assume infinite precision)

Discrete distribution
For each outcome we associate a probability of occurrence From this we can compute the distribution function
0.16 0.14 0.12
Probability

Number of students (x)

40
41 42 43 44 45 46 47 48 49

Probability
0.025
0.05 0.05 0.05 0.075 0.1 0.1 0.15 0.15 0.1 0.075 0.05 0.025

F(x)

0.025
0.025+0.05=0.03 0.03+0.05=0.035

... 0.925+0.05=0.975 0.975+0.025=1

0.1 0.08 0.06 0.04 0.02 0 40 41 42 43 44 45 46 47 48 49 50 51 52 Number of students

50 51 52

Expected value (Mean) of a discrete distribution

Continuous distributions
The density function is such that the area underneath corresponds to 1 (100%) What is the probability of a particular value of occurring?
0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0

100%

9. 85 9. 95 10 .0 5 10 .1 5 10 .2 5 10 .3 5 10 .4 5 10 .5 5 10 .6 5 10 .7 5 10 .8 5 10 .9 5

The normal distribution

Continuous Defined by two parameters: mean () and standard deviation () Let x=54, F(x) is the probability that the outcome is less or equal to 54.
It is the area under the curve, on the left of 54
0.07 0.06 0.05 0.04 0.03 0.02 0.01 0

81.13 %
33 36 39 42 45 48 51 54 57 60 63

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What is the probability that the outcome is greater than 54?

= 48, = 6

66

How to measure variability?

A possible measure is variance, or standard deviation
Variance: average of the squared difference of a variable from its mean Standard deviation: square root of the variance

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How to measure variability?

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Coefficient of Variation
A better measure of variability is the ratio of the standard deviation to the mean. This ratio is called the coefficient of variation.
Coefficient of Variation = Standard Deviation (SD) / Mean(expected value)

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Sum of Random Numbers

Often we have to analyze sum of random numbers. Examples include: The sum of the demand of different products processed by the same resource
The total demand for cars produced by GM The total demand for knitwear at J.Crew

The sum of throughput times at two different stages of a service system (waiting time to place an order at a cafeteria and waiting time in the line to pay for the food)
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Sum of Random Numbers

Let X and Y be two random variables. The sum of X and Y is another random variable. Let S = X +Y The distribution of S will be different from that of X and Y Example: Let S be the sum of the values when you roll 2 dice simultaneously. Let X represent the value die #1 and Y represent the value of die #2 S=X+Y
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Sum of Random Numbers

The distribution of the sum S is given below:
S
2 3 4 5 Prob(S) 1/36 2/36 3/36 4/36

S
7 8 9 10

Prob(S) 6/36 5/36 4/36 3/36

5/36

11
12

2/36
1/36
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Sum of Random Numbers

0.18 0.16 0.14
Probability

0.12 0.1 0.08 0.06 0.04 0.02 0 2 3 4 5 6 7 8 9 10 11 12 Sum of the two rolls
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Sum of Random Numbers

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Expected Value and Standard Deviation of Sum of Random Numbers If a and b are known constants and X and Y are independent random variables: Mean[aX+bY] = a Mean[X] + b Mean[Y] Variance[aX+bY] = a2 Variance[X] + b2 Variance[Y]

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Uniform Distributions
Uniform Distribution: Whenever the likelihood of observing a set of numbers is equally likely
Continuous or discrete

We use notation U(a,b) to denote a uniform distribution

Example U(1,5) is uniform distribution between 1 and 5. If it is a discrete distribution then outcomes 1,2,3,4, and 5 are equally likely (each with probability 1/5) If it is a continuous distribution then all numbers between 1 and 5 are equally likely The probability density function (pdf) for continuous U(1,5) is f(X) = 0.25 for X between 1 and 5
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Exponential Distribution
The exponential distribution is often used as a model for the distribution of time until the next arrival.
The probability density function for an Exponential distribution is: f(x) = e-x, x > 0 is a parameter of the model (just as and are parameters of a Normal distribution) E[X] (or Mean[X]) = 1/ Var(X) = 1/2 Coefficient of Variation = Standard deviation / Mean 20 =1

Next Class
Waiting-line Management
How uncertainty/variability and utilization rate determine the system performance http://www.youtube.com/watch?v=F5Ri_HhziI0&feat ure=player_embedded

ARES reading
The Psychology of Waiting-lines A Long Line for a Shorter Wait at the Supermarket