Applied Statistics in Business &

Economics, 5th edition

David P. Doane and Lori E. Seward

Prepared by Lloyd R. Jaisingh

Edited: Tuan Bui

McGraw-Hill/Irwin Copyright © 2015 by The McGraw-Hill Companies, Inc. All rights reserved.
References

 Textbook: Doane, D. P. & Seward, L. E. (2016). Applied

Statistics in Business and Economics (5th ed.). McGraw
Hill International Edition.
 Recommended readings: Berenson, M. L., David M. L.,
& Timothy, C. K. (2004). Basic Business Statistics (9th
ed.). Prentice-Hall.
 Statistical Software: R

Peter Dalgaard, Introductory Statistics with R. Springer,

(2008)
 Chapter 1
Overview of Statistics

Chapter Contents

1.1 What is Statistics?

1.2 Why Study Statistics?
1.3 Statistics in Business
1.4 Statistical Challenges
1.5 Critical Thinking

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 Chapter 1
Overview of Statistics

Chapter Learning Objectives

LO1-1: Define statistics and explain some of its uses.

LO1-2: List reasons for a business student to study statistics.
LO1-3: Explain the uses of statistics in business.
LO1-4: State the common challenges facing business
professionals using statistics.
LO1-5: List and explain common statistical pitfalls.

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What is Statistics?
Most people become familiar with probability and statistics through
radio, television, newspapers, and magazines. For example, the
following statements were found in newspapers:
• Ten of thousands parents in Malaysia have chosen StemLife as their trusted
stem cell bank.
• The death rate from lung cancer was 10 times for smokers compared
to nonsmokers.
• The average cost of a wedding is nearly $5,000.
• In USA, the median salary for men with a bachelor’s degree is $49,982, while
the median salary for women with a bachelor’s degree is $35,408.
• Globally, an estimated 500,000 children under the age of 15 live with Type 1
diabetes.
• Women who eat fish once a week are 29% less likely to develop heart disease.

(Unknown resources)
 Chapter 1
LO1-1 1.1 What is Statistics?

LO1-1: Define statistics and explain some of

its uses.

• Statistics is the science of collecting, organizing, analyzing,

interpreting, and presenting data.

• A statistic is a single measure (number) used to summarize

a sample data set; for example, the average height of
students in a university.

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 Chapter 1
LO1-1 1.1 What is Statistics?

• For the height of students, a graduation gown manufacturer may

need to know the average height for the length of the gowns or an
architect may need to know the maximum height to design the
height of the doorways of the classrooms. Both the average and
the maximum are examples of statistics.
• There are two primary kinds of statistics.
• Descriptive Statistics refers to the collection, presentation, and
summary of data (either using charts and graphs or using
numerical summary).
• Inferential Statistics refers to the generalizing from a sample to a
population, estimating unknown population parameters, drawing
conclusions, and making decisions.

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 START

Gathering of
Data

Classification,
Summarization, and
Processing of data

Presentation and
Communication of
Summarized information

Yes
Use sample information
Is Information from a
to make inferences about
sample?
the population Statistical
Inference
No
Descripti
ve
Draw conclusions about
Statistics Use cencus data to
the population
analyze the population
characteristic (parameter)
characteristic under study
under study

STOP

(Unknown resources)
 Chapter 1
LO1-1 1.1 What is Statistics?

• Figure 1.1 identifies the tasks and the chapters for each.

Figure 1.1

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 Chapter 1
LO1-2 1.2 Why Study Statistics?

LO1-2: List reasons for a business student to study

statistics.
• Knowing statistics will make you a better
consumer of other people's data analyses.
• You should know enough to handle everyday
data problems, to feel confident that others
cannot deceive you with spurious arguments, and
to know when you've reached the limits of your
expertise.

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 Chapter 1
LO1-2 1.2 Why Study Statistics?

• Statistical knowledge gives a company a

competitive advantage against organizations that
cannot understand their internal or external
market data.
• Mastery of basic statistics gives an individual
manager a competitive advantage as one works
one’s way through the promotion process, or
when one moves to a new employer.
• Here are some reasons to study statistics.

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 Chapter 1
LO1-2 1.2 Why Study Statistics?

Communication
Understanding the language of statistics facilitates
communication and improves problem solving.

Computer Skills
The use of spreadsheets for data analysis and word
processors or presentation software for reports
improves upon your existing skills

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 Chapter 1
LO1-2 1.2 Why Study Statistics?

Information Management
Statistics helps summarize small and large amounts of
data and reveal underlying relationships.

Technical Literacy
Career opportunities are in growth industries propelled
by advanced technology. The use of statistical software
increases your technical literacy.

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 Chapter 1
LO1-2 1.2 Why Study Statistics?

Process Improvement
Statistics helps firms oversee their suppliers, monitor
their internal operations, and identify problems.

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Minicase: Can Statistics Predict Airfares?

 When you book an airline ticket online, does it annoy you

when the next day you find a cheaper fare on exactly the
same flight? Or do you congratulate yourself when you
get a “good” fare followed by a price rise?
 a company called Farecast that examines over 150
billion “airfare observations” and tries to use the data to
predict whether or not the fare for a given ticket is likely
to rise.
 The company’s prediction accuracy so far is estimated at
61 percent (in independent tests) and 75 percent (the
company’s tests).
 Chapter 1
LO1-3 1.3 Statistics in Business
LO1-3: Explain the uses of statistics in business.

Auditing
Sample from over 12,000 invoices to estimate the
proportion of incorrectly paid invoices.

Marketing
Identify likely repeat customers for Amazon.com and
suggest co-marketing opportunities based on a
database of 5 million Internet purchases.

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 Chapter 1
LO1-3 1.3 Statistics in Business

Health Care
Evaluate 100 incoming patients using a 42-item physical
and mental assessment questionnaire.

Quality Improvement
Initiate a triple inspection program, setting penalties for
workers who produce poor-quality output.

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 Chapter 1
LO1-3 1.3 Statistics in Business

Purchasing
Determine the defect rate of a shipment and whether
that rate has changed significantly over time.

Medicine
Determine whether a new drug is really better than the
placebo or if the difference is due to chance.

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 Chapter 1
LO1-3 1.3 Statistics in Business

Operations Management
Manage inventory by forecasting consumer demand.

Product Warranty
Determine the average dollar cost of engine
warranty claims on a new hybrid engine

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Minicase: Sell Noodles with Statistics?

 Noodles & Company, quick casual restaurant, first

opened in Colorado in 1995. As of June 2014, they had
over 400 restaurants.
 They used statistical analysis that provide answers to
questions such as:
o Should we offer continuity/loyalty cards for our customers?
o How can we increase the use of our extra capacity during the
dinner hours?
o Which new city should we open in?
o Which location should we choose for the new restaurant?
o …
 Chapter 1
LO1-4 1.4 Statistical Challenges

LO1-4: State the common challenges facing

business professionals using statistics.

The Ideal Data Analyst (should possess these characteristics)

• Is technically current (e.g., software-wise).

• Communicates well.
• Is proactive.

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 Chapter 1
LO1-4 1.4 Statistical Challenges

The Ideal Data Analyst (should possess these characteristics)

• Has a broad outlook.
• Is flexible.
• Focuses on the main problem.
• Meets deadlines

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 Chapter 1
LO1-4 1.4 Statistical Challenges

The Ideal Data Analyst (should possess these characteristics)

• Knows his/her limitations and is willing to ask for help.

• Can deal with imperfect information.
• Has professional integrity.

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 Chapter 1
LO1-4 1.4 Statistical Challenges

Imperfect Data and Practical Constraints

State any assumptions and limitations and use generally
accepted statistical tests to detect unusual data points or
to deal with missing data. You will face constraints on
the type and quality of data you can collect.
 Missing data
 Biased data
 low quality data
 …

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 Chapter 1
LO1-4 1.4 Statistical Challenges

Business Ethics

Some broad ethical responsibilities of business are

• Treating customers in a fair and honest manner.

• Complying with laws that prohibit discrimination.
• Ensuring that products and services meet safety
regulations

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 Chapter 1
LO1-4 1.4 Statistical Challenges

Business Ethics
Some broad ethical responsibilities of business are
(continued)

• Standing behind warranties.

• Advertising in a factual and informative manner.
• Encouraging employees to ask questions and voice
concerns about the company’s business practices.
• Being responsible for accurately reporting information to
management.

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 Chapter 1
LO1-4 1.4 Statistical Challenges

Upholding Ethical Standards

Ethical standards for the data analyst:

• Know and follow accepted procedures.

• Maintain data integrity.
• Carry out accurate calculations.

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 Chapter 1
LO1-4 1.4 Statistical Challenges

Upholding Ethical Standards

Ethical standards for the data analyst (continued):

• Report procedures faithfully.

• Protect confidential information.
• Cite sources.
• Acknowledge sources of financial support.

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 Chapter 1
LO1-4 1.4 Statistical Challenges

Using Consultants
Hire consultants at the beginning of the project, when your
team lacks certain skills or when an unbiased or informed
view is needed.
Note:
Some companies expect their employees to be able to
interpret the results of a statistical analysis, even if it was
completed by an outside consultant.

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 Chapter 1
LO1-4 1.4 Statistical Challenges

Communicating with Numbers

• Numbers have meaning only when communicated in the
context of a certain situation.
• Presentation should be such that managers will quickly
understand the information they need to use in order to
make good decisions.

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 Chapter 1
LO1-4 1.4 Statistical Challenges

Skills Needed for Success in Business

For initial (Table 1.1)
For long-range Common
job success job success weaknesses
Managerial Communication
Report-writing
accounting skills
Accounting Managerial
Writing skills
principles economics
Mathematics Managerial finance Immaturity
Statistics Oral Unrealistic
communication expectations

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 Chapter 1
1.5 Critical Thinking
LO1-5: List and explain common statistical pitfalls..

• Statistics is an essential part of critical thinking

because it allows us to test an idea against
empirical evidence.

• Empirical data represent data collected through

observation and experiments.

• Statistical tools are used to compare prior ideas

with empirical data, but pitfalls do occur.

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 Chapter 1
LO1-5 1.5 Critical Thinking

Pitfall 1: Conclusions from a Small Samples.

Be careful about making generalizations from small

samples
Example: test a new drug with a group of 10 patients
and they all showed improvement. Any conclusion?

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 Chapter 1
LO1-5 1.5 Critical Thinking

Pitfall 2: Conclusions from Nonrandom Samples

Be careful about making generalizations from small

samples and from retrospective studies of special groups

Example: Measure the average height of the basketball

team members and infer it to be the average height of
the entire school.

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 Chapter 1
LO1-5 1.5 Critical Thinking

Pitfall 3: Conclusions from Rare Events

Be careful about drawing strong inferences from

events that are not surprising when looking at the
entire population (e.g., winning the lottery).

Pitfall 4: Poor Survey Methods

Be careful about using poor sampling methods or

vaguely worded questions (e.g., anonymous survey or
quiz).
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 Chapter 1
LO1-5 1.5 Critical Thinking
Pitfall 5: Assuming a Causal Link

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 Chapter 1
LO1-5 1.5 Critical Thinking
Pitfall 5: Assuming a Causal Link

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 Chapter 1
LO1-5 1.5 Critical Thinking
Pitfall 5: Assuming a Causal Link

• Assuming causal link sometimes refers to post-hoc fallacy

The rooster crows immediately before sunrise.

Therefore, the rooster causes the Sun to rise.

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 Chapter 1
LO1-5 1.5 Critical Thinking

Pitfall 6: Generalization to Individuals

Avoid reading too much into statistical generalizations
(e.g., men are taller than women). Yes, but only in a
statistical sense. Men are taller on average, but many
women are taller than many men.

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 Chapter 1
LO1-5 1.5 Critical Thinking

Pitfall 7: Unconscious Bias

Be careful about unconsciously or subtly allowing bias
to color handling of data (e.g., heart disease in men vs.
women). Symptoms in men are more obvious than in
women.

Pitfall 8: Significance versus Importance

Statistically significant effects may lack practical

importance (e.g., Austrian military recruits born in the
spring average 0.6 cm taller than those born in the
fall). Would anyone notice this difference?
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