Let be a positive constant. Consider the following probability distribution:
The above distribution is said to be a Poisson distribution with parameter . The Poisson distribution is usually used to model the random number of events occurring in a fixed time interval. As will be shown below, . Thus the parameter is the rate of occurrence of the random events; it indicates on average how many events occur per unit of time. Examples of random events that may be modeled by the Poisson distribution include the number of alpha particles emitted by a radioactive substance counted in a prescribed area during a fixed period of time, the number of auto accidents in a fixed period of time or the number of losses arising from a group of insureds during a policy period.
Each of the above examples can be thought of as a process that generates a number of arrivals or changes in a fixed period of time. If such a counting process leads to a Poisson distribution, then the process is said to be a Poisson process.
We now discuss some basic properties of the Poisson distribution. Using the Taylor series expansion of , the following shows that is indeed a probability distribution.
The generating function of the Poisson distribution is (see The generating function). The mean and variance can be calculated using the generating function.
The Poisson distribution can also be interpreted as an approximation to the binomial distribution. It is well known that the Poisson distribution is the limiting case of binomial distributions (see  or this post).
One application of is that we can use Poisson probabilities to approximate Binomial probabilities. The approximation is reasonably good when the number of trials in a binomial distribution is large and the probability of success is small. The binomial mean is and the variance is . When is small, is close to 1 and the binomial variance is approximately . Whenever the mean of a discrete distribution is approximately equaled to the mean, the Poisson approximation is quite good. As a rule of thumb, we can use Poisson to approximate binomial if and .
As an example, we use the Poisson distribution to estimate the probability that at most 1 person out of 1000 will have a birthday on the New Year Day. Let and . So we use the Poisson distribution with . The following is an estimate using the Poisson distribution.
Another useful property is that the independent sum of Poisson distributions also has a Poisson distribution. Specifically, if each has a Poisson distribution with parameter , then the independent sum has a Poisson distribution with parameter . One way to see this is that the product of Poisson generating functions has the same general form as (see The generating function). One interpretation of this property is that when merging several arrival processes, each of which follow a Poisson distribution, the result is still a Poisson distribution.
For example, suppose that in an airline ticket counter, the arrival of first class customers follows a Poisson process with a mean arrival rate of 8 per 15 minutes and the arrival of customers flying coach follows a Poisson distribution with a mean rate of 12 per 15 minutes. Then the arrival of customers of either types has a Poisson distribution with a mean rate of 20 per 15 minutes or 80 per hour.
A Poisson distribution with a large mean can be thought of as an independent sum of Poisson distributions. For example, a Poisson distribution with a mean of 50 is the independent sum of 50 Poisson distributions each with mean 1. Because of the central limit theorem, when the mean is large, we can approximate the Poisson using the normal distribution.
In addition to merging several Poisson distributions into one combined Poisson distribution, we can also split a Poisson into several Poisson distributions. For example, suppose that a stream of customers arrives according to a Poisson distribution with parameter and each customer can be classified into one of two types (e.g. no purchase vs. purchase) with probabilities and , respectively. Then the number of “no purchase” customers and the number of “purchase” customers are independent Poisson random variables with parameters and , respectively. For more details on the splitting of Poisson, see Splitting a Poisson Distribution.
- Feller W. An Introduction to Probability Theory and Its Applications, Third Edition, John Wiley & Sons, New York, 1968