Basic Statistics

1) Data Types – Continuous, Discrete, Nominal, Ordinal, Interval,

Ratio, Random Variable, Probability, Probability Distribution
2) First, second, third & fourth moment business decisions
3) Graphical representation – Bar plot, Histogram, Boxplot,
Scatter diagram
4) simple Linear Regression
5) Hypothesis Testing
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Data types:
1) Continuous 2) Discrete
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Data types: Preliminaries
Normal: Merely labels, no further information can be gleaned.
Ex: “coke” and “Pepsi”
Ordinal: Conveys only up to preference information. Direction alone.
Ex: “I prefer coffee to tea”
Interval: Conveys relative magnitude information, in addition to
preference.
Ex: “I rate coke a 7 and Pepsi a 4 on a scale of 10.
Ratio: Conveys information on an absolute scale.
Ex: “I paid Rs11 for coke and Rs13 for Pepsi”.
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Random Variable
A random variable describes the probabilities for an uncertain future
numerical outcome of a random process.
It is variable because it can take one of several possibilities.
It is a random because there is some chance associated with each
possible value.
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Poker cards example:
 Suppose you have randomly picked a card from the card deck. What
is the probability that this card will be?
- Bigger than 10?
- Equal to or Bigger than 10?
- Smaller than 3
- Greater than 4 and less than 8
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What is probability of sale?

What is the probability of selling at least 3 tv’s?
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Sampling Funnel:
1) Population 2) Sampling frame 3) SRS 4) Sample
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Measures of central tendency
First moment Business decision:
Population –Mean or Average (µ) = (∑ (xi))/N
Sample-Mean or Average (𝑋) = (∑ (xi))/n
Median - Middle value of the data
Mode - Most occurring value in the data
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Measures of Dispersion
Second moment Business decision:
Range= Max-Min
Population variance = σ2= (∑(X-µ)2)/N
Population standard deviation =sqrt ((∑ (xi-population mean) 2)/N)
Sample variance
(∑(x-𝑥) 2)/ (n-1)
Sample standard deviation = sqrt ((∑ (xi-sample mean) 2)/(n-1))
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Expected Value
For a probability distribution, the mean of the distribution is known
as the expected value
The expected value intuitively refers to what one would find if they
repeated the experiment an infinite number of times and took the
average of all of the outcomes
Mathematically, it is calculated as the weighted average of each
possible value
The formula for calculating the expected value for a discrete random
variable X, denoted by μ, is:
∑ Xp(X)
The variance of a discrete random variable X, denoted by σ2 is
σ2 = ∑ [(x-µ/σ)] 2 = ∑ (x- µ)2p(x)
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Graphical techniques:
1) Bar plot : plotting each point in bar shape

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Histogram: Represents frequency distribution of data, how many
observations of take the value within certain interval.

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Third Business Moment: Skewness
4rth Business Moment: Kurtosis
Skewness
• A measure of asymmetry in the distribution
• Mathematically it is given by: E [(x-µ/σ)] 3
 • Negative skewness implies mass of the Distribution is
concentrated on the Right
Kurtosis
• A measure of the “Peakedness” of the distribution
• Mathematically it is given by E[(x-µ/σ)]4 -3
• For Symmetric distributions, negative Kurtosis implies wider peak
and thinner tails

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Boxplot:

• Range (IQR): The middle half of a data set falls within the inter-
quartile range. – Inter Quartile Range.
 • Box Plot: This graph shows the distribution of data by dividing the
data into four groups with the same number of data points in each
group. The box contains the middle 50% of the data points and
each of the two whiskers contain 25% of the data points. It displays
two common measures of the variability or spread in a data set
• Range: It is represented on a box plot by the distance between the
smallest value and the largest value, including any outliers. If you
ignore outliers, the range is illustrated by the distance between the
opposite ends of the whiskers
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Normal Distribution
The normal random variable takes values from -∞ to +∞
The Probability associated with any single value of a random
variable is always zero
Area under the entire curve is always equal to 1.
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. Characterized by bell shaped

Properties:
 • 68.26% of values lie within ±1 σ from the mean
• 95.46% of the values lie within ±2 σ from the mean
• 99.73% of the values lie within ± 3σ from the mean

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X~N(µ,σ)
Characterized by mean, µ, and standard deviation, σ

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Z scores, Standard Normal Distribution:
• For every value (x) of the random variable X, we can calculate Z
score : Z = (X-µ)/ σ
• Interpretation − How many standard deviations away is the value
from the mean?

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Calculating Probability from Z distribution
Suppose GMAT scores can be reasonably modelled using a normal
distribution
− µ = 711 σ = 29

What is p(x ≤ 680)?

 Step 1: Calculate Z score corresponding to 680
Z = (680-711)/29 = -1.06
Step 2: Calculate the probabilities using Z – Tables
- P (Z ≤ -1) = 0.14

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• What is P (697≤ X ≤ 740)?
• Step 1 : Use P(x1 ≤ X ≤ x2) = Use P( X ≤ x2) − P( X ≤ x1)

•
• Step 2 : Calculate P( X ≤ x2) and P( X ≤ x1) as before
 P(X ≤ 740) = P (Z ≤ 1) = 0.84; P(X ≤ 697) = P ( Z ≤ - 0.5) = 0.31

• Step 3 : Calculate P( 697 ≤ X ≤ 740 ) = 0.84 – 0.31 = 0.53

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Normal Quantile plot (Q-Q plot):

To check whether the data is normally distributed

If plot is straight line (do not have to be absolute straight line) then we say data is
normally distributed
If not then they are not normally distributed.
X-axis ->theoretical Quantiles
Y-axis ->Sample Quantiles

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Sampling variation
- Sample mean varies from one sample to another.
- Sample mean can be (and most likely is) different from the
population mean.
- Sample mean is a random variable.
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Central Limit Theorem
The Distribution of the sample mean
- will be normal when the distribution of data in the population is
normal
- will be approximately normal even if the distribution of data in the
population is not normal if the “sample size” is fairly large
Mean (X) = µ (the same as the population mean of the raw data)

Standard Deviation (X) = σ /√𝑛, where σ is the population standard

deviation and n is the sample size
- This is referred to as standard error of mean.
The standard error of the mean estimates the variability between
samples whereas the standard deviation measures the variability within
a single sample.

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Sample Size Calculation
A Sample Size of 30 is considered large enough, but that may /may not
be adequate
More Precise conditions
- n > 10( K3 )2 , where ( K3 ) is sample skewness and
- n > 10( K4 ) , where ( K4) is sample kurtosis

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Confidence Interval
• What is the Probability of tomorrow’s temperature being 42
degrees?
• Probability is ‘0’
• Can it be between [-50⁰C & 100⁰C]?

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Case Study: Confidence Interval
• A University with 100,000 alumni is thinking of offering a new
affinity credit card to its alumni.
• Profitability of the card depends on the average balance
maintained by the card holders.
• A Market research campaign is launched, in which about 140
alumni accept the card in a pilot launch.
 • Average balance maintained by these is $1990 and the standard
deviation is $2833. Assume that the population standard
deviation is $2500 from previous launches.
• What we can say about the average balance that will be held after
a full−fledged market launch?
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Interval estimates of parameters
• Based on sample data
− The point estimate for mean balance = $1990
− Can we trust this estimate?
• What do you think will happen if we took another random sample
of 140 alumni?
• Because of this uncertainty, we prefer to provide the estimate as
an interval (range) and associate a level of confidence with it
• Interval Estimate = Point Estimate ± Margin of Error
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Confidence Interval for the Population Mean

Start by choosing a confidence level (1-α) % (e.g. 95%, 99%, 90%)
Then, the population mean will be with in
X ± Z1-ᾳ σ/ √𝑛 where Z1-ᾳ satisfies p (-Z1-ᾳ ≤ Z ≤ Z1-ᾳ) = 1-ᾳ
Margin of error depends on the underlying uncertainty, confidence
level and sample size.
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Calculate Z value - 90%, 95% & 99%
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Confidence Interval Calculation
• Based on the survey and past data
• − n = 140; σ = $2500; X = $ 1990
σ𝑥 = σ/√𝑛 = 2500/√(140) = 211.29
• Construct a 95% confidence interval for the mean card balance
and interpret it?
• Construct a 90% confidence interval for the mean card balance
and interpret it?

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Confidence Interval Interpretation
Consider the 95% Confidence interval for the mean income:
[$1576, $2404]
Does this mean that?
- The mean balance of the population lies in the range?
 - The mean balance is in this range 95% of the time?
- 95% of the alumni have balance in this range?
Interpretation 1 : Mean of the population has a 95% chance of
being in this range for a random sample
Interpretation 2 : Mean of the population will be in this
range for 95% of the random samples
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What if we don’t know Sigma?
• Suppose that the alumni of this university are very
different and hence population standard deviation from
previous launches cannot be used
We replace σ with our best guess (point estimate) s, which
is the standard deviation of the sample:

Calculate:

• If the underlying population is normally distributed , T is a

random variable distributed according to a t-distribution
with n-1 degrees of freedom Tn-1
• Research has shown that the t-distribution is fairly robust
to deviation of the population of the normal model
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Student’s t-distribution

As n -> ꝏ
tn -> N(0,1)
i.e., as the degrees of the freedom increase, the t-
distribution approaches the standard normal distribution.
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Confidence Interval for mean with unknown Sigma
𝑥 ± Z1-ᾳ σ/ √𝑛 where Z1-ᾳ satisfies p (-Z1-ᾳ ≤ Z ≤ Z1-ᾳ) = 1-ᾳ
Instead of above equation we can use the below t distribution
equation
𝑥 ± t1-ᾳ, n-1 s/ √𝑛 where t1-ᾳ, n-1 satisfies p (-t1-ᾳ, n-1 ≤ Tn-1≤ t1-ᾳ, n-1) = 1-ᾳ
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Calculating t-value
• Construct a 95% confidence interval for the mean card balance
and interpret it?
n = 140; σ = $2500; 𝑥 = $ 1990
σ𝑥 = 2833/sqrt(140) = 239.46
Calculate t0.95, 139 = 1.98
Then the 95% confidence interval for balance is [$1516, $2464]