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In this chapter we shall learn to apply techniques of statisticalinference to business situations. I will first introduce the basic ideaunderlying statistical inference and hypothesis testing. Our focuswill be more on understanding key concepts intuitively and lesson formulas and calculations, which can be done easily oncomputers.A business manager in a typical managerial situation needs todetermine whether results based on samples can be generalized toa population. Different management situations require differentstatistical techniques to carryout tests regarding the applicability of sample statistics to a population.By the end of this unit you should be able to
Understand the nature of statistical inference
Understand types of statistical inference
Understand the theory behind statistical inference
Apply sampling theory concepts to confidence intervals andestimation
Nature of Statistical Inference
What is Statistical Inference?
We have seen that all managerial/ business situations involvedecision making in situations with incomplete information. Whena particular finding emerges from data analysis the manager askswhether the empirical findings represent the true picture or haveoccurred as a result of sampling accident.Statistical inference is the process where we generalize from sampleresults to a population from which the sample has been drawn.Thus statistical inference is the process where we extend ourknowledge obtained from a random sample which is only a smallpart of the population to the whole population.
Where do we use Statistical Inference?
Let us think of a typical managerial situation: Imagine you are apurchase manager. Your basic problem is to ensure that aconsignment of Aluminum sheets supplied to you by a suppliercorrespond to the required specification of .04 inch thickness.How do you go about ensuring this?One way would be to accept blindly what ever your suppliersclaim. Another option would be to audit each and every item.Clearly this would be both very time consuming and expensiveand would result in an unacceptably low level of productivity.Another option is for the manger to choose a random sample of 100 aluminum and measures them for their thickness. He findsfor example that the sheets in the sample have an average thicknessof .048 inches. On tzhe basis of past experience with the supplierthe manager believes that the sheets come from a population witha standard deviation of .004inches. On the basis of this data hehas to make a decision whether the to accept or reject a consignmentof 10,000 sheets.To solve problems such as this we have to learn how to usecharacteristics of samples to test an assumption about thepopulation from which the sample comes from. This in effect isthe process of statistical inference.The issue facing the manager in the above example is:
Could a sample of 100 aluminum sheets with averagethickness of .048 inches have come from a population with aaverage thickness of .04 inches?
Does the sample estimate of thickness differ from thepopulation estimate due to sampling error or is it becauseour fundamental assumption about the mean thickness of the underlying population is not correct?
Suppose he believes it to be the first case and accepts theconsignment, what is the risk that he runs that theconsignment is flawed and does not conform to qualitystandards of .04 inches?This is just one example of a very typical managerial situationwhere the principles of statistical inference can be put to use tosolving the manager’s dilemma.
Types of Statistical Inference
Broadly statistical inference falls into two major categories:estimation and hypothesis testing. Both are actually two sides of the same coin and can be regarded as representing different aspectsof a technique.Below I briefly explain each of them.
This is concerned with how we use sample statistics to estimatepopulation parameters. It is not necessary that an estimate bebased on statistical data. All managers make quick estimates basedon incomplete information, gut feel and intuition. Thus an estimateof sales for the next quarter can be based on gut feel or on ananalysis of past sales data for the quarter. Both represent estimates.The difference between a estimate based on intuition and onebased on a random sample is that we can apply the principles of probability allows us to calculate percentage of error variation inan estimate attributable to sampling variation.The sample mean for example can be used as an estimate of thepopulation mean. Similarly the percentage of occurrence in a sampleof an attribute or event can be used to estimate the populationproportion . To explain the concept a little more clearly we canlook at a few examples of estimation:
University departments make estimates of next yearsenrollments on the basis of last years enrollments in thesame courses.
Credit managers make estimates about whether a purchaserwill pay his bills on the basis of past behaviour of customers with similar characteristics or their past repaymentrecord
LESSON 17:PRINCIPLES OF STATISTICAL INFERENCE AND CONFIDENCE INTERVALS