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INSE 6320 -- Week 2

Risk Analysis for Information and Systems Engineering

• Risk and Uncertainty

• Elementary Probability Theory

Dr. M. AMAYRI Concordia University

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Risk

• Risk can be viewed as uncertainty

• Similarly risk analysis can be viewed as decision making in terms of
uncertainty.
• Risk can be analyzed intuitively or analytically
• In a lot of day-to-day activities, risk is considered intuitively
§ Such skills are honed via years of experience in dealing with some situations
• Humans have limitations in handling multiple pieces of information
§ Analytic techniques are required for complex problems where a lot of factors
are required.
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Relative Risk or Risk Ratio (RR)

• Relative risk is a ratio of the probability of an event occurring in the exposed
group versus the probability of the event occurring in the non-exposed
group.

Risk in exposed
RR =
Risk in non-exposed
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Example

•If RR = 1, then Risk in exposed = Risk in non-exposed

(exposure has no association with disease)
•If RR > 1, then Risk in exposed > Risk in non-exposed
(exposure may be positively associated with disease)
•If RR < 1, then Risk in exposed < Risk in non-exposed
(exposure may be negatively associated with disease)
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Odds Ratio (OR)

“Odds”is often known as the ratio of money that may be won versus the amount of money bet
§ In statistics, an odds of an event is the ratio of:
- The probability that the event WILL occur to the probability that the event will NOT occur

• If OR = 1, then Exposure is not related to disease

• If OR > 1, then Exposure is positively related to disease
• If OR < 1, then Exposure is negatively related to disease
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Calculating an Odds Ratio

• 2x2 table is commonly used with dichotomous variables to compare groups of
people
• Table puts one dichotomous variable across the rows and another dichotomous
variable along the columns
• Useful in determining the association between a dichotomous exposure and a
dichotomous outcome
Table 1. Sample 2x2 table for Hepatitis A at Restaurant A
Outcome

Hepatitis A No Hepatitis A Total

Ate salsa 218 (a) 45 (b) 263

Exposure
Did not eat
21 (c) 85 (d) 106
salsa
Total 239 130 369

• Table displays data from a case control study conducted in Pennsylvania in 2003 (2)
• Can calculate the odds ratio:
OR = ad = (218)(85) = 19.6
bc (45)(21)
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Comparing OR to RR
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Comparing OR to RR
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Why Learn Probability?

• Nothing in life is certain. In everything we do, we gauge the chances of
successful outcomes, from business to medicine to the weather

• A probability provides a quantitative description of the chances or likelihoods

associated with various outcomes or events.

• An event is an outcome of an experiment:

§ The basic element to which probability is applied
§ Something about which a decision maker is uncertain
• The probability of an event A measures “how often” A will occur. We write P(A).

• Probability provides a mechanism for making quantitative statements about

uncertainty

• Probability is used to quantify the uncertainty we face in our hard decisions.

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Probability of an Event
• The probability of an event E denoted by P(E) is defined as the limiting
proportion of times that E occurs.

§ Axiom 1: 0 £ P ( E ) £ 1
EC
§ Axiom 2: P( S ) = 1
E
§ Axiom 3: for E  F = Æ, E Ì S and F Ì S
P( E  F ) = P( E ) + P( F )

Properties:
EF
P( E c ) = 1 - P( E ) E F

P( E  F ) = P( E ) + P( F ) - P( E  F )
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Basic Probability Concepts

• Probability – the chance that an uncertain event will occur (always
between 0 and 1)
• Impossible Event – an event that has no chance of occurring
(probability = 0)
• Certain Event – an event that is sure to occur (probability = 1)
Range of probabilities rule
• The probability of an event E is between 0 and 1, inclusive.
0 ≤ P(E) ≤ 1

Even
Impossible Unlikely chance Likely Certain
[ ]
0 0.5 1
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Types of Probability
Classical (theoretical) Probability
• Each outcome in a sample space is equally likely.
Number of outcomes in event E
P( E ) =
Number of outcomes in sample space

Empirical (statistical) Probability

• Based on observations obtained from probability experiments.
• Relative frequency of an event.

Frequency of event E f
P( E ) = =
Total frequency n
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Example: Finding Classical Probabilities

You roll a six-sided die. Find the probability of each event.

1. Event A: rolling a 3
2. Event B: rolling a 7
3. Event C: rolling a number less than 5

Solution:
Sample space: {1, 2, 3, 4, 5, 6}
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Solution: Finding Classical Probabilities

1. Event A: rolling a 3 Event A = {3}

1
P(rolling a 3) = » 0.167
6

2. Event B: rolling a 7 Event B= { } (7 is not in the sample

space)
0
P(rolling a 7) = = 0
6
3. Event C: rolling a number less than 5
Event C = {1, 2, 3, 4}
4
P(rolling a number less than 5) = » 0.667
6
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Example: Finding Empirical Probabilities

A company is conducting an online survey of randomly selected individuals to
determine if traffic congestion is a problem in their community. So far, 320
people have responded to the survey. What is the probability that the next
person that responds to the survey says that traffic congestion is a serious
problem in their community?

Response Number of times, f

Serious problem 123
Moderate problem 115
Not a problem 82
Σf = 320
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Solution: Finding Empirical Probabilities

Response Number of times, f

event Serious problem 123 frequency

Moderate problem 115
Not a problem 82
Σf = 320

f 123
P(Serious problem) = = = 0.384
n 320
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Example: Probability of the Complement of an Event

You survey a sample of 1000 employees at a company and record

the age of each. Find the probability of randomly choosing an
employee who is not between 25 and 34 years old.

Employee ages Frequency, f

15 to 24 54
25 to 34 366
35 to 44 233
45 to 54 180
55 to 64 125
65 and over 42
Σf = 1000
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Solution: Probability of the Complement of an Event

• Use empirical probability to find

the probability P(age 25 to 34) Employee ages Frequency, f
15 to 24 54
25 to 34 366
f 366
P(age 25 to 34) = = = 0.366 35 to 44 233
n 1000 45 to 54 180
55 to 64 125
• Use the complement rule 65 and over 42
Σf = 1000
366
P(age is not 25 to 34) = 1 -
1000
634
= = 0.634
1000
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Mutually Exclusive Events

Mutually exclusive
• Two events A and B cannot occur at the same time

A
A B
B

A and B are mutually A and B are not mutually

exclusive exclusive
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Example: Mutually Exclusive Events

Decide if the events are mutually exclusive.
Event A: Roll a 3 on a dice.
Event B: Roll a 4 on a dice.

Solution:
Mutually exclusive (The first event has one
outcome, a 3. The second event also has one
outcome, a 4. These outcomes cannot occur at the
same time.)
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Example: Mutually Exclusive Events

Decide if the events are mutually exclusive.
Event A: Randomly select a male student.
Event B: Randomly select a nursing major.

Solution:
Not mutually exclusive (The student can be a male
nursing major.)
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Computing Joint and Marginal Probabilities

• The probability of a joint event, A and B:

number of outcomes satisfying A and B
P( A and B) = P( A  B ) =
total number of elementary outcomes

• Computing a marginal (or simple) probability:

P(A) = P(A  B1 ) + P(A  B2 ) +  + P(A  Bk )

where B1, B2, …, Bk are k mutually exclusive and collectively

exhaustive events
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Joint Probability Example

P(Red and Ace)

number of cards that are red and ace 2

= =
total number of cards 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
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Marginal Probability Example

P(Ace)

2 2 4
= P( Ace and Re d) + P( Ace and Black ) = + =
52 52 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
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Marginal & Joint Probabilities In A Contingency Table

Event
Event B1 B2 Total
A1 P(A1 and B1) P(A1 and B2) P(A1)

A2 P(A2 and B1) P(A2 and B2) P(A2)

Total P(B1) P(B2) 1

Joint Probabilities Marginal (Simple) Probabilities

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General Addition Rule

General Addition Rule:

P( A  B) = P( A) + P( B) - P( A  B )

If A and B are mutually exclusive, then

P( A  B) = 0, so, the rule can be simplified:

P( A  B) = P( A) + P( B)
For mutually exclusive events A and B
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General Addition Rule Example

P(Red or Ace) = P(Red) +P(Ace) - P(Red and Ace)

= 26/52 + 4/52 - 2/52 = 28/52

Don’t count
Color the two red
Type Red Black Total aces twice!

Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
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Computing Conditional Probabilities

• A conditional probability is the probability of one event, given that

another event has occurred:

P(AB) The conditional

P(A|B) = probability of A given
P(B) that B has occurred

P(AB) The conditional

P(B|A) = probability of B given
P(A) that A has occurred

Where P(AB) = P(A and B) = joint probability of A and B

P(A) = marginal or simple probability of A
P(B) = marginal or simple probability of B
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Example: Finding Conditional Probabilities

The table below shows the results of a study in which researchers

examined a child’s IQ and the presence of a specific gene in the
child. Find the probability that a child has a high IQ, given that the
child has the gene.

Gene Gene not

Present present Total
High IQ 33 19 52
Normal IQ 39 11 50
Total 72 30 102
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Solution: Finding Conditional Probabilities

There are 72 children who have the gene. So, the sample space
consists of these 72 children.

Gene Gene not

Present present Total
High IQ 33 19 52
Normal IQ 39 11 50
Total 72 30 102

Of these, 33 have a high IQ.

33
P( B | A) = P (high IQ|gene present) = » 0.458
72
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Independence of Events and Marginal Probability

• Two events are independent if and only if: P( A | B) = P( A)

• Events A and B are independent when the probability of one event
is not affected by the fact that the other event has occurred

The occurrence of one of the events does not affect the probability of
the occurrence of the other event
§ P(B | A) = P(B) or P(A | B) = P(A)
§ Events that are not independent are dependent

• Marginal probability for event A (also called total probability of A):

P( A) = P( A | B1 ) P( B1 ) + P( A | B2 ) P( B2 ) +  + P( A | Bk ) P( Bk )
where B1, B2, …, Bk are k mutually exclusive and collectively exhaustive events
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Multiplication Rules

• Multiplication rule for two events A and B:

P(AB) = P(A|B) P(B)

Note: If A and B are independent, then P(A | B) = P(A)

and the multiplication rule simplifies to

P(AB) = P(A) P(B)

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Example: Using the Multiplication Rule

Two cards are selected, without replacing the first card, from a
standard deck. Find the probability of selecting a king (K) and
then selecting a queen (Q).

Solution:
Because the first card is not replaced, the events are dependent.
P( KQ) = P( K ) P(Q | K )
4 4
= ×
52 51
16
= » 0.006
2652
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Example: Using the Multiplication Rule

A coin is tossed, and a die is rolled. Find the probability of getting a

head and then rolling a 6.

Solution:
The outcome of the coin does not affect the probability of rolling a 6 on
the die. These two events are independent.

P( H and 6) = P ( H ) P (6)
1 1
= ×
2 6
1
= » 0.083
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Example: Using the Multiplication Rule

The probability that a particular knee surgery is successful is 0.85.

Find the probability that three knee surgeries are successful.

Solution:
The probability that each knee surgery is successful is 0.85. The
chance for success for one surgery is independent of the chances for
the other surgeries.
P(3 surgeries are successful) = (0.85)(0.85)(0.85)
≈ 0.614
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Example: Using the Multiplication Rule

Find the probability that none of the three knee surgeries is successful.

Solution:
Because the probability of success for one surgery is 0.85. The
probability of failure for one surgery is 1 – 0.85 = 0.15

P(none of the 3 surgeries is successful) = (0.15)(0.15)(0.15)

≈ 0.003
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Example: Using the Multiplication Rule

Find the probability that at least one of the three knee surgeries is
successful.

Solution:
“At least one” means one or more. The complement to the event “at
least one successful” is the event “none are successful.” Using the
complement rule
P(at least 1 is successful) = 1 – P(none are successful)
≈ 1 – 0.003
= 0.997
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The Addition Rule

Addition rule for the probability of A or B
• The probability that events A or B will occur is
§ P(A or B) = P(A) + P(B) – P(A and B)
• For mutually exclusive events A and B, the rule can be simplified to
§ P(A or B) = P(A) + P(B)
§ Can be extended to any number of mutually exclusive events

A
A B
B
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Example: Using the Addition Rule

The frequency distribution shows the

Sales volume ($) Months
volume of sales (in dollars) and the number
0–24,999 3
of months a sales representative reached
25,000–49,999 5
each sales level during the past three
50,000–74,999 6
years. If this sales pattern continues, what
75,000–99,999 7
is the probability that the sales
100,000–124,999 9
representative will sell between $75,000
125,000–149,999 2
and $124,999 next month?
150,000–174,999 3
175,000–199,999 1
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Solution: Using the Addition Rule

• A = monthly sales between $75,000 and Sales volume ($) Months

$99,999
0–24,999 3
• B = monthly sales between $100,000 25,000–49,999 5
and $124,999 50,000–74,999 6
• A and B are mutually exclusive 75,000–99,999 7
100,000–124,999 9
P( A or B ) = P ( A) + P ( B ) 125,000–149,999 2
150,000–174,999 3
7 9
= + 175,000–199,999 1
36 36
16
= » 0.444
36
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Example: Using the Addition Rule

A blood bank catalogs the types of blood given by donors during the
last five days. A donor is selected at random. Find the probability the
donor has type O or type A blood.

Type O Type A Type B Type AB Total

Rh-Positive 156 139 37 12 344
Rh-Negative 28 25 8 4 65
Total 184 164 45 16 409
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Solution: Using the Addition Rule

The events are mutually exclusive (a donor cannot have type O blood
and type A blood)

Type O Type A Type B Type AB Total

Rh-Positive 156 139 37 12 344
Rh-Negative 28 25 8 4 65
Total 184 164 45 16 409

P(type O or type A) = P (type O ) + P (type A)

184 164
= +
409 409
348
= » 0.851
409
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Example: Using the Addition Rule

Find the probability the donor has type B or is Rh-negative.

Type O Type A Type B Type AB Total

Rh-Positive 156 139 37 12 344
Rh-Negative 28 25 8 4 65
Total 184 164 45 16 409
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Example: Using the Addition Rule

Find the probability the donor has type B or is Rh-negative.

Type O Type A Type B Type AB Total

Rh-Positive 156 139 37 12 344
Rh-Negative 28 25 8 4 65
Total 184 164 45 16 409

Solution:
The events are not mutually exclusive (a donor can have type B blood
and be Rh-negative)
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Solution: Using the Addition Rule

Type O Type A Type B Type AB Total

Rh-Positive 156 139 37 12 344

Rh-Negative 28 25 8 4 65

Total 184 164 45 16 409

P(type B or Rh - neg )
= P(type B ) + P ( Rh - neg ) - P (type B and Rh - neg )
45 65 8 102
= + - = » 0.249
409 409 409 409

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Practice Problem
An insurance company believes that drivers can be divided into two
classes—those that are of high risk and those that are of low risk.
Their statistics show that a high-risk driver will have an accident at
some time within a year with probability 0.4, but this probability is only
0.1 for low-risk drivers.

a) Assuming that 20% of the drivers are high-risk, what is the

probability that a new policy holder will have an accident within a
year of purchasing a policy?
b) If a new policy holder has an accident within a year of purchasing
a policy, what is the probability that he is a high-risk type driver?
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Answer to (a)

Assuming that 20% of the drivers are of high-risk, what is

the probability that a new policy holder will have an
accident within a year of purchasing a policy?

Use law of total probability:

P(accident)=
P(accident|high risk)*P(high risk) +
P(accident|low risk)*P(low risk) =
.40(.20) + .10(.80) = .08 + .08 = .16
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Answer to (b)

If a new policy holder has an accident within a year of

purchasing a policy, what is the probability that he is a high-risk
type driver?

P(high-risk|accident)=
P(accident|high risk)*P(high risk)/P(accident)
=.40(.20)/.16 = 50%

Or use tree: P(high risk)=.20

P(accident/HR)=.4 P(accident, high risk)=.08

P( no acc/HR)=.6
P(no accident, high risk)=.12)

P(accident/LR)=.1
P(low risk)=.80 P(accident, low risk)=.08

P( no P(no accident, low risk)=.72

accident/LR)=.9 ______________
1.0

P(high risk|accident)=.08/.16=50%