Statistical

Methods
IPM – Term I, September 2022

Dr. Landis Conrad Felix Michel

The covariance has a major flaw as a measure of the linear relationship between two
numerical variables. Because the covariance can have any value, you cannot use it to determine
the relative strength of the relationship.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
 In Panel A, the coefficient of
correlation, r, is -0.9. You can
see that for small values
of X, there is a very strong
tendency for Y to be large.
Likewise, the large values of
X tend to be paired with
small values of Y. The data
do not all fall on a straight
line, so the association
between X and Y cannot be
described as perfect

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

• Correlation alone cannot prove that there is a causation effect—that is, that the change in
the value of one variable caused the change in the other variable
• A strong correlation can be produced by chance; by the effect of a lurking variable, a third variable not considered
in the calculation of the correlation; or by a cause-and-effect relationship. You would need to perform
additional analysis to determine which of these three situations actually produced the correlation.
Therefore, you can say that causation implies correlation, but correlation alone does not imply causation.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

4. Basic • A probability is the numerical value representing the

Probability
chance, likelihood, or possibility that a particular event will
occur.

Concepts • In all these instances, the probability involved is a proportion or

fraction whose value ranges between 0 and 1, inclusive.
• An event that has no chance of occurring (the impossible
event) has a probability of 0.
• An event that is sure to occur (the certain event) has a
probability of 1.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

• In a priori probability, the probability of an occurrence is based on prior knowledge of
the process involved.

• The number of ways the event occurs and the total number of possible outcomes are
known

• Consider a standard deck of cards that has 26 red cards and 26 black cards. The probability
of selecting a black card is 26/52 = 0.50.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

• In the empirical probability approach, the probabilities are based on observed data, not
on prior knowledge of a process.

• Surveys are often used to generate empirical probabilities.

Examples of this type of probability are the proportion of registered voters who prefer a
certain political candidate, and the proportion of students who have part-time jobs. For example,
if you take a survey of students, and 60% state that they have part-time jobs, then there is a
0.60 probability that an individual student has a part-time job.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

For example, when you toss a coin, the two possible outcomes are heads and tails
When you roll a standard six-sided die in which the six faces
of the die contain either one, two, three, four, five, or six dots, there are six possible simple
events. An event can be any one of these simple events, a set of them, or a subset of all of them

Getting two heads when you toss a coin twice is an example of a joint event because it
consists of heads on the first toss and heads on the second toss.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

The complement of a head is a tail because that is the only event that is not a head. The
complement of five dots on a die is not getting five dots. Not getting five dots consists of getting
one, two, three, four, or six dots.

The sample space for tossing a coin consists of heads and tails. The sample space when
rolling a die consists of one, two, three, four, five, and six dots. Example 4.2 demonstrates
events and sample spaces.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

• Empirical Probability:
• Sample of 1,000 households in terms of purchase behaviour for large TVs

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
Joint Probability Example:

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

• The marginal probability of an event consists of a set of joint probabilities

For example, if B consists of two events, B1 and B2, then P(A), the probability of event
A, consists of the joint probability of event A occurring with event B1 and the joint probability
of event A occurring with event B2

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
Conditional probability refers to the probability of event A, given information about the
occurrence of another event, B.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
Decision Trees

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

• When the outcome of one event does not affect the probability of occurrence of another
event, the events are said to be independent.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
5.1 Discrete Probability Distributions
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
References – Additional Readings
• Chapters 3,4,5 “Statistics for Managers, Using Microsoft Excel”, 8th Edition, David M. Levine,
David Stephan, Kathryn A. Szabat.

•.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel