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Learn VEE Mathematical Stats 3 3.1 3.1.1 Confidence Interval Basics

Confidence Interval Basics

In this section, we will cover interval estimation for a parameter. The idea is to construct an interval known as a
confidence interval. The parameter of interest lies within this interval with a certain level of confidence. Broadly
speaking, we require the following to obtain a confidence interval:

• A methodology

• A suitable distribution

• A confidence level

• Data

In general, consider

Pr(L ≤ θ ≤ U) = k

This describes a random interval (L, U) that encloses a generic parameter of interest θ . Notice that the random
components above are L and U . In other words, θ is not random, which makes sense since it is a parameter.
When data is collected (meaning values of random variables are observed) and plugged into L and U , the
resulting numerical interval is a 100k% confidence interval for θ . As such, k is known as the confidence level.

Pivotal Method
One of the most basic methods to construct a confidence interval is called the pivotal method. The method relies on
a pivotal quantity, which is a function of the variables observed from a sample and the unknown parameters of the
variables' distribution. This means a pivotal quantity is a random variable. Most importantly, the distribution of a
pivotal quantity must not depend on the aforementioned parameters.

COACH'S REMARKS

The definition for "pivotal quantity" is similar but not the same to the definition for "statistic" introduced in Section 1.2.
Here is how they differ:

If a pivotal quantity consists of unknown parameter values, then the pivotal quantity is not a statistic.

If a statistic's sampling distribution depends on unknown parameters, then the statistic is not a pivotal quantity.
We will illustrate how this method works with the following trivial example.

Random variable X has CDF

2
FX (x) = 1 − ( ) ,
θ
x>0
x+θ

θ
A pivotal quantity is Y = , with CDF
X
2
FY (y) = ( ) ,
y
y>0
y+1

noting that its distribution does not depend on θ .

Assuming X was observed to equal 3.5, use this pivotal quantity to construct a 95% confidence interval for the
parameter θ .

Start with the following probability statement involving the pivotal quantity:

Pr(a ≤ Y ≤ b) = 0.95

Let a be the 2.5th percentile of Y , and b the 97.5th percentile of Y . Thus,

2
( ) = 0.025
a
⇒ a = 0.1878
a+1

2
( ) = 0.975
b
⇒ b = 78.4968
b+1

All that's left is to obtain the form Pr(L ≤ θ ≤ U) = 0.95 from the initial probability statement.

Pr(0.1878 ≤ Y ≤ 78.4968) = 0.95

⇒ Pr (0.1878 ≤
θ
≤ 78.4968) = 0.95
X
⇒ Pr(0.1878X ≤ θ ≤ 78.4968X) = 0.95
 

This means the random interval (L, U) is (0.1878X, 78.4968X) . Having observed X to be 3.5, the 95%
confidence interval for θ is

(0.1878[3.5], 78.4968[3.5]) = (0.6573, 274.7389)

So instead of a point estimate for the unknown value of θ , we have produced an interval which — with reasonably
high confidence — includes the value of θ . With this example, the key takeaways are:

• In general, L and U are functions of random variables and constants. The random variables are substituted
by observed data to compute the confidence interval.

• The constants in L and U come from the desired confidence level and the pivotal quantity's distribution.

MORE INFORMATION

There is often confusion in interpreting a confidence interval. For the trivial example above, the temptation is to
conclude that there is a 95% probability that θ is between 0.6573 and 274.7389; this is an incorrect interpretation
of the interval. Remember that θ has a fixed (albeit unknown) value. The value simply is within the interval, or simply
is not. There is no element of chance or randomness.

Instead, it is accurate to say that 95% of numerous, similarly constructed intervals would enclose θ . While
(0.6573, 274.7389) is one of these intervals, it is practically impossible to know whether it is among the 95% that
would enclose θ , or the 5% that would not. This is what it means to be 95% confident.

This section will use the pivotal method to construct a confidence interval for the following parameters:

• Mean

• Difference in means

• Proportion

• Variance

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