Theory of Estimation– an introduction

R.Venkatesakumar
Department of Management Studies
School of Management, Pondicherry University
Puducherry, INDIA
Basic Concepts / Definitions
 Estimation Methods

Estimation

Point Interval
Estimation Estimation
 Estimation
 The objective of any marketing research is to draw
inferences about the population
 It may be population mean [average number cups of
coffee consumed by the people in the district]
 Or population proportion [percentage of male
consumers who consume coffee vs. female
consumer consumption per day]
 or any other characteristics of the population.
 It is often achieved by taking a sample and draw
inference from it.
 This process is known as estimation.
 Target Parameter

The unknown population parameter (e.g., mean or

proportion) that we are interested in estimating is
called the target parameter.

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Point Estimates


Interval Estimates

 Provide a range of estimate for an unknown

population characteristic based on a sample.
 Point Estimation: Population Parameters

 Unbiased Estimators - the expected value of the

estimator equals the population parameter
 Using n − 1 in the denominator of the sample
variance s2 results in an unbiased estimator of σ2.

is an unbiased
estimator of
 Point Estimator

A point estimator of a population parameter is a

rule or formula that tells us how to use the sample
data to calculate a single number that can be used
as an estimate of the target parameter.

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 Point Estimation
Provides a single value
Based on observations from one sample
Gives no information about how close the value is
to the unknown population parameter

Example: Sample mean x = 3 - is the point

estimate of the unknown population mean
Margin of Error and the Interval Estimate

A point estimator cannot be expected to provide the

exact value of the population parameter.

An interval estimate can be computed by adding and

subtracting a margin of error to the point estimate.

Point Estimate +/- Margin of Error

The purpose of an interval estimate is to provide

information about how close the point estimate is to
the value of the parameter.
Margin of Error and the Interval Estimate

The general form of an interval estimate of a

population mean is

x  Margin of Error
 Estimation Process

Population Random Sample

I am 95% confident
that μ is between 40
Mean
Mean, , is  & 60.
unknown  x = 50

 
Sample


 


 Need for constructing CI

 Before deciding to offer a credit card to alumni of

a university, the credit company wants to know
how many customers will accept the offer and
how large a balance they will carry?

 Use confidence intervals to answer such questions

 They convey information about the precision of the
estimates

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 Need for constructing CI

 Two Parameters of Interest here…

 “p”, the proportion who will return the application

for the credit card

 “µ”, the average monthly balance that those who

accept the credit card will carry

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 Key Elements of Interval Estimation

Sample statistic
Confidence interval
(point estimate)

Confidence limit Confidence limit

(lower) (upper)

A confidence interval provides a range of plausible

values for the population parameter.
 Confidence Interval Construction
According to the Central Limit Theorem, the sampling
distribution of the sample mean is approximately normal for
large samples.
Let us calculate the interval estimator:
1.96
x  1.96 x  x 
n
That is, we form an interval from 1.96 standard deviations below the
sample mean to 1.96 standard deviations above the mean.
Prior to drawing the sample, - 2 Questions need answers:
1) Knowledge about SD
2) what are the chances that this interval will enclose µ, the
population mean?
 Interval Estimate of a Population Mean:
Population SD Known

In order to develop an interval estimate of a

population mean, the margin of error must
be computed using either:
the population standard deviation ‘σ’ , or
• the sample standard deviation ‘s’
 ‘σ’ is rarely known exactly, but often a
good estimate can be obtained based on
historical data or other information.

 We refer to such cases as the ‘σ’ known case.

 Confidence Interval

If sample measurements yield a value of x that falls

between the two lines on either side of µ, then the
interval x  1.96 x will contain µ.

The area under the

normal curve between
these two boundaries is
exactly .95.
Thus, the probability
that a randomly
selected interval will
contain µ is equal to
.95.
 Confidence Level / (Coefficient)

The confidence coefficient is the probability

that a randomly selected confidence interval
encloses the population parameter
that is, the relative frequency with which similarly
-

constructed intervals enclose the population

parameter when the estimator is used repeatedly a
very large number of times.
The confidence level is the confidence
coefficient expressed as a percentage.
Interval Estimate of a Population Mean:
σ Known

Sampling
distribution
of x
1 -  of all
/2 /2
x values
interval
does not x
include   interval
interval
z /2  x z /2  x includes
includesμ
[------------------------- x -------------------------]
[------------------------- x -------------------------]
[------------------------- x -------------------------]
 95% Confidence Level

If our confidence level is 95%, then in the long run, 95% of

our confidence intervals will contain µ and 5% will not.

For a confidence coefficient of 95%, the area in the two

tails is .05.
To choose a different confidence coefficient we increase or
decrease the area (call it ) assigned to the tails. If we
place /2 in each tail

and z/2 is the z-value, the

confidence interval with
  .
coefficient (1 – ) is x  z 2 x
 Example
Interval Estimate of a Population Mean:
σ Known
Example: Discount Sounds
More has 260 retail outlets throughout the Tamil Nadu.
The firm is evaluating a potential location for a new
outlet, based in part, on the mean annual income of
the individuals in the marketing area of the new
location.

A sample of size n = 36 was taken;

Sample mean income is INR 41,100.
The population is not believed to be highly skewed.
The population standard deviation is estimated to be
INR 4,500
Construct confidence interval using coefficient 0.95.
 Example
Interval Estimate of a Population Mean:
σ Known

95% of the sample means that can be observed

are within + 1.96  x of the population mean μ.

The margin of error is:

  4,500 
z /2  1.96    1,470
n  36 

Thus, at 95% confidence, the margin of error

is $1,470.
 Example
Interval Estimate of a Population Mean:
σ Known

Interval estimate of μ is:

$41,100 + $1,470
or
$39,630 to $42,570

We are 95% confident that the interval contains the

population mean.
 Use SPSS Data file: CI Construction
CI for Mean

Analyze
Command: Descriptive Statistics
Explore

Use: 1)Satisfaction score

2) Then try across gender & age

Alternate Analyze
Command: Compare Mean
One sample t test
Confidence Interval for the Proportion

 The Central Limit Theorem implies a

normal model for the sampling distribution
of p̂ .

 E( p̂ ) = p and SE( p̂ ) = p (1  p ) / n
 Sampling Distribution of pˆ
1. The mean of the sampling distribution of p̂ is p;
that is, p̂ is an unbiased estimator of p.

2. The standard deviation of the sampling

distribution of p̂ is pq n ; that is,  p̂  pq n
where q = 1–p.
3. For large samples, the sampling distribution of p̂
is approximately normal. A sample size is
considered large if both np̂  15 and nq̂  15.
 Large-Sample Confidence Interval for p̂

pq p̂q̂
p̂  z 2  p̂  p̂  z 2   p̂  z 2 
n n
x
where p̂  and q̂  1  p̂.
n

Note: When n is large, p̂ can approximate the

value of p in the formula for  p̂ .
Thank You

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