Lecture 11:

Distribution of sample mean 𝑋ത

Monte Carlo Simulations
ECO220Y – Intro to Data Analysis and
Applied Econometrics

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Last lecture
• Sample statistics are RV
– Can find distributions analytically,
theoretically, or empirically
• Proportion in sample is linear transformation of
binomial
• Can be approximated by Normal distribution
under certain condition (large sample size)

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• Can use approximation to find probabilities
• Variance goes down with sample size
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ratings
𝜇𝑋 = 𝐸 𝑋 ≈ 4.376

Draw 𝑛 = 10 users at random, compute mean

rating 𝑋ത

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• Expectation, Variance, Distribution?
• What is 𝑃(𝑋ത ≥ 4.5)?
 1
Expectation of 𝑋ത = (𝑋1 + ⋯ + 𝑋10 )
10
1
𝐸 𝑋ത = 𝐸 𝑋1 + 𝑋2 + ⋯ + 𝑋10
10
1 1
= 𝐸 𝑋1 + ⋯ + 𝐸 𝑋10 = 10 ⋅ 𝐸 𝑋
10 10

ഥ = 𝑬 𝑿 = 𝝁𝑿
𝑬 𝑿 = 4.376

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Still true if we take a sample of 𝑛 = 50?
 1
Variance of 𝑋ത = (𝑋1 + ⋯ + 𝑋10 )
10
1
𝑉 𝑋ത = 2 𝑉 𝑋1 + 𝑋2 + ⋯ + 𝑋10
10
Assume independent draws
1 1
= 2 𝑉 𝑋1 + ⋯ + 𝑉 𝑋10 = 2 10 ⋅ 𝑉 𝑋
10 10
𝑽 𝑿 𝝈𝟐𝑿
𝑽 𝑿ഥ = = = 0.124
𝟏𝟎 𝟏𝟎
𝝈𝑿
ഥ =

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𝒔𝒅 𝑿
𝟏𝟎
Still true if we take a sample of 𝑛 = 50?
10% Rule
For draws of a sample to be considered
independent:

• Either draw with replacement (eg from

population of dice rolls)

• Or draw without replacement, but with small

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enough 𝑛: less than 10% population
– Intuition: if you have drawn 50% of
population, it’s easier to guess the next draw
Summary
1
For 𝑋 = (𝑋1 + ⋯ + 𝑋𝑛 )
ത
𝑛

ഥ = 𝑬 𝑿 = 𝝁𝑿
• 𝑬 𝑿

𝑽 𝑿 𝝈𝟐𝑿
ഥ =
• 𝑽 𝑿 =
𝒏 𝒏

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𝒔𝒅 𝑿 𝝈𝑿
ഥ
• 𝒔𝒅 𝑿 = =
𝒏 𝒏
Distribution of 𝑋ത ?
If 𝑋 Normally distributed 𝑁 𝜇, 𝜎 2
• 𝑋ത linear combinations of 𝑛 r.v. Normally
distributed
• With previous info:
𝜎𝑋2
𝑋ത ∼ 𝑁 𝜇𝑋 ,
𝑛

• NB: if we take a sample of different size 𝑛′, we

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get another random variable
– If there’s confusion denote 𝑋ത10 … 𝑋ത50
Central Limit Theorem
For 𝒏 large enough, the distribution of sample
mean 𝑿 ഥ approximately follows a Normal,
regardless of the original distribution of 𝑿

• Computation of 𝐸(𝑋)
ത and 𝑉(𝑋)
ത still apply

• “𝑛 large enough”:
– Rule of thumb: 𝒏 ≥ 𝟑𝟎

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– If distribution of 𝑋 almost normal, can use less
– If distribution of 𝑋 very different from normal,
probably need more
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Average of 𝑛 = 50 dice rolls

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True CLT
For 𝒏 large enough, the distribution of a Linear
combination of 𝒏 independent RVs follows a
Normal, regardless of the individual
distribution of the RVs

• But sample mean is just a rescaled sum, so a

linear combination

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Empirical method

MONTE CARLO SIMULATION

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Monte Carlo simulation
Manhattan Project: secret
development of nuclear weapon
• Q: how much do neutrinos
travel through material
(shielding)?
• Von Neumann & Ulam: can’t
solve equations exactly
• Solution: simulate them as
random process a large

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number of time using ENIAC
(first computer)
Monte Carlo simulation
1. Fix 𝑛
2. Draw 𝑛 values at random from population
3. Compute statistics and record it
4. Repeat steps 2 and 3 a higher number of times
(eg 100,000)

• Use the 100,000 samples to infer distribution of

sample statistic

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– Graphically
– Numerically (STATA)
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ratings X (Firefox rating)
-------------------------------------------------------------
Percentiles Smallest
1% 1 1
5% 1 1
10% 3 1 Obs 2,954,953
25% 4 1 Sum of Wgt. 2,954,953

50% 5 Mean 4.376244

Largest Std. Dev. 1.112566
75% 5 5
90% 5 5 Variance 1.237804
95% 5 5 Skewness -1.903797
• 𝐸 𝑋 ≈ 4.376 99% 5 5 Kurtosis 5.68557

Draw 𝑛 = 10 users at random, compute mean

rating 𝑋ത

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• Expectation, Variance, Distribution?
• What is 𝑃(𝑋ത ≥ 4.5)?
Firefox Monte Carlo simulation
1. Fix 𝑛 = 10
2. Draw 10 values at random from population
3. Compute statistics (here 𝑋)
ത and record it
4. Repeat steps 2 and 3 for 1,000,000 samples

Use the 1,000,000 simulated samples to infer

distribution of 𝑋ത

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Distribution of 𝑋ത
• 68.0% of values
between 4.378-
0.351 and
4.378+0.351

• 96.8% of values
within 2sd

• 99.3% of values
within 3sd

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𝑃 𝑋ത ≥ 4.5 ?
If we had assumed 𝑋ത ∼ 𝑁 4.376,0.124 :
4.5 − 4.376
𝑃 𝑋ത ≥ 4.5 = 𝑃 𝑍 ≥ = 0.362
0.124

Using Monte Carlo: 𝑃 𝑋ത ≥ 4.5 = 0.459

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Discrepancies
If we take one sample of 10 and find 𝑋ത ≥ 4.5:
• Sampling error
• Simulation error: chance difference between
true probability distribution and simulated
probability distribution
– Do large number of samples to reduce it

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Distribution of 𝑋ത50
• 68.8% of values
between 4.376-
0.351 and
4.378+0.351

• 95.2 % of values
within 2sd

• 99.6% of values
within 3sd

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Reminder: Distrib. of 𝑃෠ as sample size ↑

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Precision
2
𝜎𝑋
𝐸 𝑋ത = 𝜇𝑋 𝑉 𝑋ത =
𝑛

With larger sample size,

• Distribution becomes Normal (CLT starts
working)

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• Variance of 𝑋ത becomes smaller
Distribution of 𝑋ത as 𝑛 ↗

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Distribution of 𝑋ത (100,000 repetitions)

Sample ഥ)
𝑬(𝑿 ഥ)
𝑽𝒂𝒓(𝑿 % obs. % obs. % obs.
size 𝒏 within within within
1sd 2sd 3sd

10 4.378 0.123 68.2 96.7 99.3

50 4.377 0.025 68.8 95.2 99.6
100 4.377 0.012 67.5 95.3 99.7

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1000 4.376 0.0012 68.8 95.5 99.7
+∞ 4.376 0 68.3 95.4 99.7
Sample mean as an estimate of population
mean

Imagine we do not know 𝜇𝑋 and would like to find

its value:

• Collect a sample of 𝑛 observations in population

• In expectation, sample mean equal to 𝜇𝑋
– Because 𝐸 𝑋ത = 𝜇𝑋

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• Higher 𝑛 ⇒ lower V 𝑋ത ⇒ 𝑋ത more precise
estimate of 𝜇𝑋
Key messages
𝑉 𝑋
For a given 𝑛: 𝐸 𝑋 = 𝐸(𝑋) and 𝑉 𝑋 =
ത ത
𝑛
– 10 percent rule
Shape: CLT: distribution of 𝑋ത approximately Normal if
𝑛 large enough (the less Normally distributed 𝑋 is, the
higher 𝑛 should be)
• If not sure: Monte Carlo simulations let us
empirically estimate distribution

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– Can be generalized to other statistics than 𝑋ത
• As 𝑛 increases, variance of 𝑋ത decreases
• Estimate 𝜇𝑋 using 𝑋ത