DPBS 1203

Business and Economic Statistics

Lecture 4.2
Calculating normal probabilities
 Normal random variables are
continuous  probabilities need to
be calculated as integrals
– Suppose the time (in minutes) it
takes to assemble a computer is
assumed to be X~N(50,100)
– What is the probability that a
computer is assembled in
between 45 and 60 minutes?
– We need tables, as there are no
“closed form” analytical solutions
for such integrals
Calculating normal probabilities…
 Strategy for calculations:
– Step 1: Standardize the variable, to yield an equivalent
probability statement for a standard normal variable
– Step 2: Use the standard normal tables
 Be careful as these can come in different forms!
 Some tables provide P(0 < Z < z)
 Others tables provide P(-∞<Z<z)
 What is P(45 < X < 60) in our computer assembly example?
– Standard normal tables are in Black’s Appendix
Calculating normal probabilities…
f(z)0.5
0.4
pdf
0.3

0.2

0.1

0
-4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4

z
F(z) 1
0.9
0.8 F(z) 0.5
0.7
0.6 0.4
0.5 0.3
0.4
0.3 0.2 P(0 < Z < z)
P(-∞<Z<z) 0.2 0.1
0.1
0 0
-4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 0 0.5 1 1.5 2 2.5 3 3.5 4

z z
Calculating normal probabilities…
 45 − 50 X − µ 60 − 50 
P (45 < X < 60) = P < < 
 10 σ 10 
= P( −0.5 < Z < 1)

 OK, but suppose we only have tables for P(0 < Z < z) or P(-∞<Z<z) ??
– Solution: we can always manipulate probabilities into the needed form!
 Recall some properties of the normal distribution:
– Symmetric around its mean (which is 0 for the standard normal)
– Area under the whole pdf equals 1 (and area under half of it equals .5)
Calculating normal probabilities…
 45 − 50 X − µ 60 − 50 
P(45 < X < 60) = P < < 
 10 σ 10 
= P(−0.5 < Z < 1)
 P(-0.5 < Z < 1)=P(-0.5 < Z < 0)+P(0 < Z < 1)
 P(-0.5 < Z < 1)= P(-∞<Z<1) - P(-∞<Z<-.5) (take this to one type of
standard normal table)
 Now note that:
– P(-0.5 < Z < 0)=P(0 < Z < 0.5) by symmetry (take this to another type
of standard normal table)
– P(-0.5 < Z < 0) = .5 – P(-∞<Z<-.5) (by facts about area under the curve)
and P(0 < Z < 1) = .5 – P(-∞<Z<-1) (by symmetry and facts about area
under the curve) (verify using the first type of standard normal table)
P(0 < Z < 1) = .5 – P(-∞<Z<-1)
= .5 – .1587
= .3413

P(-0.5 < Z < 0) = .5 – P(-∞<Z<-.5)

= .5 - .3085 P(-∞<Z<-1)
= .1915

P(-∞<Z<-.5)
P(0 < Z < 0.5)

P(0 < Z < 1)

Calculating normal probabilities…
 Our required probabilities from this table are:
– P(0 < Z < 1) = .3413
– P(0 < Z < 0.5) = .1915
–  P(-0.5 < Z < 1) = .3413+.1915 = .5328
–  The probability of observed assembly time being between 45 and 60
minutes is .5328 (IFF assembly line time is drawn from a normal distribution!)
 To try at home: What is…
– P(Z >1) ?
– P(-1 < Z < 1) ?
– P(Z ≥1) ?
Calculating normal percentiles
 Tables can be used to solve 2 types of problems:
– Given a particular z, find P(0 < Z < z); OR
– Given a particular probability A, find zA such that P(Z > zA) = A or
P(Z < zA) = 1 - A
– Note that zA in the above expression is the [100*(1-A)]th percentile
of a standard normal!
Calculating normal percentiles…
 Use tables to verify that z0.025 = 1.96
 What is the…
– 97.5th percentile?

– 2.5th percentile?

– 97.5th percentile in computer assembly line

example – in the original distribution?
1.96=(X0.025 – 50)/10
X0.025 =(1.96)10+50 = 69.6 minutes
Normal approximation to the binomial
 We have used the formula or
the binomial tables to
evaluate probabilities for a
binomial random variable
– This is convenient for a
small number of trials (n)
– What if n is large?
 An important application of
the normal distribution is to
approximate the binomial
distribution for large n
Normal approximation to the binomial…
 Denote a binomial random variable by XB , and suppose p = .5
and n = 20
– We know that E(XB) = np = 10 and Var(XB) = np(1-p) = 5
– It may seem natural to choose the approximating normal
random variable as XN~N(10,5)
– How good is this approximation?
 Consider P(10 ≤ XB ≤ 12) = .1762 + .1602 + .1201 = .4565
while, using our approximation based on the standard The mean of
normal distribution, our X is 10
and its std dev
P(10 ≤ XN ≤ 12)=P(0 ≤ Z ≤ 0.89) = .3133 is sqrt(5)
– Yuck! What went wrong with this approximation?
 Would you approximate P(XB=10) by P(XN=10)?
Normal approximation to the binomial ...

 We need a continuity correction

– We could approximate P(XB=10) by P(9.5 ≤ XN ≤ 10.5)
– In general, we could approximate…
 P(XB ≤ x) by P(XN ≤ (x+0.5))
 P(XB ≥ x) by P(XN ≥ (x-0.5))
 Now let’s reconsider our approximation:
– P(10 ≤ XB ≤ 12)=.4565
– Use P(9.5 ≤ XN ≤ 12.5) instead of P(10 ≤ XN ≤ 12)
– Does this improve the approximation?
Normal approximation to the binomial ...
 Now let’s reconsider our approximation:
P(10 ≤ XB ≤ 12)

 On a number line it looks like this:

9.5 10 10.5 11 11.5 12 12.5

 Note that in this case it includes 10 and 12. Thus to make sure we
capture all of this we go back a little bit at 10 (9.5) and a bit more
forward at 12 (12.5). This is what’s missing previously.
Normal approximation to the binomial…
 9.5 − 10 X − µ 12.5 − 10 
P(9.5 ≤ X N ≤ 12.5) = P ≤ ≤ 
 5 σ 5 
= P(−0.22 ≤ Z ≤ 1.12)
= P(−0.22 ≤ Z ≤ 0) + P(0 ≤ Z ≤ 1.12)
= .0871 + .3686 = .4557

0.4557 ≈ 0.4565. Not too bad as an approximation!

Normal approximation to the binomial ...
 Now let’s reinforce this let’s say that now it is:
P(10 <XB ≤ 12)

 On a number line it looks like this:

9.5 10 10.5 11 11.5 12 12.5

 Note that in this case it includes doesn’t include 10 but includes 12.
Thus to make sure we capture all of this we go forward a little bit at
10 (10.5) to avoid it and a bit more forward at 12 (12.5). Try this for
other cases.
Normal approximation of binomial:
correcting for continuity
Correction
Values Being Determined

x> +.50
x≥ -.50
x< -.50
x≤ +.05
≤x≤ -.50 and +.50
<x< +.50 and -.50
Example: Airline meals
 On a recent flight from Sydney to
Perth, all 160 passengers were
offered a lunch choice of beef or
chicken
 Past data indicates 60% choose
beef over chicken
 Passenger choices appear to be
independent
 On this flight, what is the probability
that more than 110 passengers will
choose beef?
The binomial distribution is appropriate,
but 160 is a lot of trials!
Let’s therefore use a normal
approximation to the binomial.
Binomial appropriate distribution but n = 160 is large
For normal approximat ion to binomial use :
μ = np = 160(.6) = 96
σ = np(1 − p ) = 160(.6)(.4) = 6.197
P ( X B > 110 ) = P ( X N > 110.5)
110.5 − 96 

= P Z >
 6.197 

= P (Z > 2.34) = .5 − P (0 < Z < 2.34)
= 0.0096
Thus the airline could justify taking only 110 beef
meals on the flight as there is only approximat ely
1 chance in 100 that they will run out of beef meals.
Stages of statistical analysis
 Define and understand the problem
– e.g. suppose a firm wants to determine the effectiveness of its
advertising
 Think about what data you would need to address the question
 Collect the appropriate data
 Analyse the data appropriately
– Use sample statistics to describe the problem
 e.g. what is a typical customer? What proportion of customers
recall the firm’s ads?
– Extract information about the population parameters on the basis of
sample statistics
 Suppose 50% of sampled customers recall the ads. What does
that sample proportion tell us about the population proportion?
 Communicate results accurately and effectively
Data collection
 In practice we can often find secondary data
– Data collected by someone else (e.g., the Australian Bureau
of Statistics), possibly for some other purpose
 Alternatively, we could collect primary data
– e.g. market researchers using mail survey or phone
interviews, customized to ask questions about the impact of
an ad
Data collection …
 Observational data measures actual behaviour or outcomes
– e.g. asking people whether they recall an ad or whether they
bought the product; or obtaining data from the company on
actual purchases and ad campaigns
– Often describes “big data” (large-N data stored in file systems
of companies or governments)
 Alternatively, experimental data imposes a treatment and
measures resultant behaviour or outcomes
– e.g. deliberately show one group an ad, and compare
subsequent purchases by that (treatment) group with another
(control) group that didn’t see the ad
Data collection…
 Designing a sample requires...
– Definition of target population
– Method of sampling
 Method of simple random sampling
– A sampling process by which all samples of the same size (n) are
equally likely to be chosen from the population of interest
– Avoids problems of selection bias where the design of sample
systematically favours certain outcomes
 What’s wrong with phone-in polls on talkback radio?
 Great example of a self-selected sample
Data collection…
 Producing a simple random
sample
– Suppose the target population is
this offering of DPBS 1203, and
we are interested in measuring
student age
– Our sample is everyone who
completed the first fortnightly
quiz and whose mobile phone
number ends in “8”
– Does this constitute a random
sample?
 If not, is it likely to produce
results that are still useful in
inferring things about the
target population?
Threats to random sampling:
• If students did not complete the first quiz, they
have no chance of being sampled
• Students with no mobile phone have no chance of
being sampled
• Numbers 0-9 are not allocated by chance in
determining mobile phone numbers
Therefore, this is unlikely to be a random sample.
But if we used the sample anyway, would its sample
statistics be likely to give a distorted view of the age
distribution of the target population (the students
enrolled in DPBS 1203 this semester)?
• Is not completing the first quiz correlated with
age?
• Non-randomness needs to impact the outcome
variable in a systematic way in order to be a
problem.
Confoundment
 Q: Does radiation from mobile phones cause cancer?
– An observational study would compare cancer rates in a
sample of users with rates in a sample of non-users
 If users have a higher incidence of cancer, is this evidence that
mobile phones cause cancer?
– (Note: There is no consistent evidence that this is the case)
– But even if a relationship were found, you would need to
account for, or control for, other factors that might explain the
finding
– Possible confounding factors:
 There is a higher use of mobile phones in cities where
exposure to other forms of radiation is higher
Confoundment …
 Suppose we design an experimental study of the cancer-
mobile phone link
– Subjects are randomly assigned to one of the following:
 A control group of non-users
 A treatment group of users
– Wait a few years, and then observe and record
differences in cancer rates
 Explain why group allocation is done at random:
Progress report
 We have discussed both discrete and continuous random
variables and their probability distributions
 We have introduced discrete and continuous theoretical
probability distributions that are useful in representing the
distributions of actual data
– Binomial, uniform and normal
– Together, these three distributions offer models for a range
of phenomena
– The normal distribution also plays a key role in the theory
of estimation
 We have introduced the basics of sampling
 Next week: On to estimation!