CHAPTER 1 – OVERVIEW OF STATISTICS
when one moves to a new employer.
1.1 WHY STUDY STATISTICS?
− It is the science of collecting, organizing, analyzing,
interpreting, and presenting data.
− A statistic is a single measure, reported as a
number, used to summarize a sample data set; for
example, the average height of students in a
university
− 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 classroom. Both
the average and the maximum are examples of
statistics.
TWO PRIMARY KINDS:
▪ DESCRIPTIVE STATISTICS
− Refers to the collection, presentation, and
summary of data (either using charts or
graphs using numerical summary).
Examples:
1. Sampling and surveys
2. Visual and displays
3. Numerical and summarizations
4. Probability methods
5. “A total of 2000 out of 15000 passed the CPA
board exam.”
6. “According to The New York Times, Dartmouth
College has the highest median mid-career salary.”
7. “As per Philippine Statistics Authority, the number
of employed persons in January was estimated at
43.7 million.”
▪ INFERENTIAL STATISTICS
− Refers to the generalization from a sample to
a population, estimating unknown population
parameters, drawing conclusion, and making
decisions.
Examples:
1. Estimating parameters
2. Testing Hypothesis
3. Regression and Trends
4. Quality Control
5. “A researcher concludes that a student’s
Mathematics grade can predict his success in
Management Science.”
6. “Drinking decaffeinated can raise cholesterol
levels by 7%.”
1.2 WHY STUDY STATISTICS?
1. Knowing statistics will make you a better
consumer of other people’s data analyses.
2. 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.
3. Statistical knowledge gives a company a
competitive advantage against organizations that
cannot understand their internal or external
market data.
4. Mastery of basic statistics gives an individual
manager a competitive advantage as one works
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one’s way through the promotion process, or
5. Communication
− Understanding the language of statistics
facilitates communication and improves
problem solving.
6. Computer skills
− The use of spreadsheets for data analysis and
word processors or presentation software for
reports improves upon your existing skills.
7. Information management
− Statistics helps summarize small and large
amounts of information (data) and reveal
underlying relationships.
8. Technical literacy
− Career opportunities are in growth industries
propelled by advanced technology the use of
statistical software increases your technical
literacy.
9. Process improvement
− Large firms have formal systems for
continuous quality improvement. Statistics
helps firms oversee their suppliers, monitor
their internal operations, and identify
problems. Quality improvement goes far
beyond statistics, but every college graduate
is expected to know enough statistics to
understand its role in quality improvement.
1.3 STATISTICS IN BUSINESS
1. Auditing
− The firm has learned that some invoices are
being paid incorrectly, but it doesn’t know
how widespread to problem is. A sample of
invoices can be used to estimate the
proportion of incorrectly paid invoices.
2. Marketing
− Many companies use Customer Relationship
Management (CRM) to analyze data from
multiple sources. With the statistical and
analytics tools such as correlation and data
mining, they identify specific needs of
different customer groups, and this helps
them market their products and services
more effectively.
3. Health care
− Evaluate 100 incoming patients using a 42-
item physical and mental assessment
questionnaire.
4. Quality improvement
− Initiate a triple inspection program, penalties
for workers who produce poor-quality output.
5. Purchasing
− A food producer purchases plastics containers
for packaging its product. Inspection of the
most recent shipment of 500 containers found
that 3 of the containers were defective. The
supplier’s historical defect rate is 0.005. Has
the defect rate really risen or is this simply a
“bad” batch.
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 6. Medicine
− Determine whether a new drug is really better
than the placebo or if the difference is due to
chance.
7. Operations management
− Manage inventory by forecasting consumer
demand.
8. Product warranty
− Determine the average dollar cost of engine
warranty claims on a new hybrid engine.
1.4 STATISTICAL CHALLENGES
The ideal analyst (business professionals using
statistics) should possess these characteristics:
• Is technically current (e.g., software-wise)
• Communicates well
• Is proactive
• Has a broad outlook
• Is flexible
• Focuses on the main problem
• Meets deadlines
• Knows his/ her limitations and is willing to ask for
help
• Can deal with imperfect information
• Has professional integrity
BUSINESS ETHICS
Some broad ethical responsibilities of business
include the following:
• Treating customers in a fair and honest manner
• Complying with laws that prohibit discrimination
• Ensuring that products and services meet safety
regulations
• 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
UPHOLDING ETHICAL STANDARDS
Ethical standards for the data analyst:
• Know and follow accepted procedures
• Maintain data integrity
• Carry out accurate calculations
• Report procedures faithfully
• Protect confidential information
• Cite sources
• Acknowledge sources of financial support
USING CONSULTANTS
− Hire consultants at the beginning of the
project, when your team lacks certain skills or
when and unbiased or informed view is
needed.
− Take note that 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.
COMMUNICATING WITH NUMBERS
− Numbers have meaning only when
communicated in the context of a certain
situations.
− 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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1.5 CRITICAL ANALYSIS
− 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.
PITFALL 1: Conclusions from SMALL samples
• Be careful about making generalizations from
small samples (e.g., a group of 10 patients who
showed improvement).
PITFALL 2: Conclusions from NONRANDOM samples
• Be careful about making generalizations from
small samples and from retrospective studies of
special groups (e.g., studying heart attack patients
without defining matched control group).
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 a lottery).
PITFALL 4: Poor survey methods
• Be careful about using poor sampling methods or
vaguely worded questions (e.g., anonymous
survey or quiz).
PITFALL 5: Assuming a causal link
• Be careful about drawing conclusions when no
cause-and-effect link exists (e.g., team who play in
named ballparks – Citi Field for the NY Mets – tend
to lose more games than they win). Actually, it is
the players and managers who determine whether
a team wins.
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.
PITFALL 7: Unconscious bias
• Be careful about unconsciously or subtly allowing
bias to color handling of data (e.g., heart disease in
men versus 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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CHAPTER 2 – DATA COLLECTION NOTE: Ambiguity is introduced when continuous data are
rounded to whole number. Be cautious
2.1 VARIABLES AND DATA
DATA TERMINOLOGY: Observations, Variables, and Data TIME-SERIES DATA AND CROSS-SECTIONAL DATA
sets. ▪ TIME SERIES DATA
▪ OBSERVATION − Each observation in the sample represents a
− A single member of a collection of items that different equally spaced point in time (e.g., years,
we want to study, such as a person, firm, or months, days).
region. − The periodicity may be annual, quarterly, monthly,
weekly, daily, hourly, etc.
▪ VARIABLE − Examples of MACROECONOMICS time series data
− A characteristic of the subject of the subject would include national income, economic
or individual such as an employee’s income indicators, and monetary data.
or an invoice amount. − Examples of MICROECONOMICS time series data
would include sales, market share, inventory
▪ DATA SET turnover, etc.
− Consists of all the values of all of the variables − For time series, we are interested in trends and
for all of the observations we have chosen to patterns over time (e.g., personal bankruptcies
observe. from 1980 to 2008)

A data set may consist of many variables. ▪ CROSS-SECTIONAL DATA

• The questions that can be explored and the − Each observation represents a different individual
analytical techniques that can be used will depend unit (e.g., person) at the same point in time (e.g.,
upon the data type and the number of variables. monthly VISA balances)
• The textbook starts with univariate data sets (one − For cross-sectional data, we are interested in:
variable), then moves to bivariate data sets (two 1. Variation among observations (e.g., accounts
variables), and multivariate data sets (more than receivable in 20 subway franchises)
two variables), as illustrated in table 2.2. 2. Relationships (e.g., whether accounts
receivables are related to sales volume in 20
DATA SET VARIABLES EXAMPLE TYPICAL subway franchises)
TASKS − We can combine the two data types to get pooled
Univariate 1 Income Histograms, cross-sectional and time series data.
Basic
statistics 2.2 LEVELS OF MEASUREMENTS
Bivariate 2 Income, Age Scatterplots, LEVEL OF CHARACTERISTICS EXAMPLES
correlation MEASUREMENT
Multivariate 3 Income, Age, Regression Nominal Categories only Eye color (blue,
Gender modeling brown, green,
etc.)
CATEGORICAL AND NUMERICAL DATA
TYPES OF DATA Ordinal Rank has meaning. Rarely, never
▪ CATEGORICAL (qualitative) No clear meaning to
− Verbal Label distance
Example: Interval Distance has Temperature (57
1. Vehicle Type (car, truck, SUV) meaning degrees Celsius)
2. Gender – binary (male, female)
Ratio Meaningful zero Accounts
− Coded Label exists Payable (21.7
Example: million dollars)
1. Vehicle Type (1, 2, 3)
2. Gender – binary (0,1)
▪ NOMINAL MEASUREMENT
▪ NUMERICAL (quantitative) − Merely identify a category
− Discrete − Are qualitative, attribute, categorical, or
Example: classification data, and can be coded numerically
1. Broken eggs in a carton (1, 2, 3, … 12) (e.g., 1 = Apple, 2 = Samsung, 3 = Dell, 4 = HP).
2. Annual dental visits (0, 1, 2, 3, …) − The only mathematical operations are COUNTING
3. Amount of money spent on clothing for the (e.g., frequencies) and simple statistics.
past month
4. Frequency of making online purchases ▪ ORDINAL MEASUREMENT
− Its codes can be ranked (e.g., 1 = Frequently, 2 =
− Continuous Sometimes, 3 = Rarely, 4 = Never).
Example: − Distance between data codes is not meaningful
1. Patient waiting line (14.27 minutes) (e.g., distance between 1 and 2, or between 3 and
2. Customer satisfaction (85.20%) 4 lacks meaning)
3. Annual family salary income − Many useful statistical tests exist for ordinal data
4. Amount of time spent studying in the library which are especially useful in social science,
marketing, and human resource research.
− Example: level of agreement to a statement

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 ▪ INTERVAL MEASUREMENT
− Not only data can be ranked, but it can also have
meaningful intervals between scale points (e.g.,
difference between 60 degrees Fahrenheit and 70
degrees Fahrenheit is same as difference between
20 degrees Fahrenheit and 30 degrees
Fahrenheit).
− Since intervals between numbers represent
distances, mathematical operations can be
performed (e.g., average).
− Zero point of interval scales is arbitrary, so ratios
are not meaningful (60 degrees Fahrenheit is not
twice as warm as 70 degrees Fahrenheit).
− Example: range of grade obtain
▪ CENSUS
− An examination of all items in a defined
population
SITUATIONS WHERE A SAMPLE MAY BE PREFERRED
1. INFINITE POPULATION
− No census is possible if the population is of
indefinite size (an assembly line can keep
producing bolts, a doctor can keep seeing more
patients).
2. DESTRUCTIVE TESTING
− The act of measurement may destroy or devalue
the item (vehicle crash tests).

▪ RATIO MEASUREMENT 3. TIMELY RESULTS

− Data have all properties of nominal, ordinal, and
interval data types, and also possess a meaningful
zero (absence of quantity being measured).
− Because of this zero point, ratios of data values are
meaningful (e.g., 20 million profit is twice as much
as 10 million).
− Zero does not have to be observable in the data; it
is an absolute reference point.
− Example: salaries, score in quiz
− Sampling may yield more timely results (checking
wheat samples for moisture content, checking
peanut butter for salmonella contamination).
4. ACCURACY
− Instead of spreading resources thinly to attempt a
census, budget might be better spent to improve
training of field interviewers and improve data
safeguards.

LIKERT SCALES 5. COST

− A special case of interval data frequently used in − Even if a census is feasible, the cost, in either time
survey research. or money, may exceed our budget.
− The coarseness of a Likert Scale refers to the
number of scale points 6. SENSITIVE INFORMATION
− A trained interviewer might learn more about
Use the following procedure to recognize data types: sexual harassment in an organization through
QUESTIONS IF “YES” confidential interviews of a small sample of
Q1. Is there a meaningful Ratio Data (statistical employees.
point? operations are allowed)
Q2. Are intervals between Interval Data (common SITUATIONS WHERE A CENSUS MAY BE PREFERRED
scale points meaningful? statistics allowed, e.g., 1. SMALL POPULATION
means and standard − If the population is small, there is little reason to
deviations) sample, for the effort of data collection may be
only a small part of the total cost.
Q3. Do scale points Ordinal Data (restricted to
represent rankings? certain types of
2. LARGE SAMPLE SIZE
nonparametric statistical
tests) − If the required sample size approaches the
population size, we might as well go ahead and
Q4. Are there discrete Nominal Data (only
take a census.
categories? counting allowed, e.g.,
finding the mode)
3. DATABASE EXISTS
− If the data are on disk, we can examine 100% of
CHANGING DATA BY RECORDING
the cases. But auditing or validating data against
• In order to simplify data or when exact data
physical records may raise the cost.
magnitude is of little interest, ratio data can be
recorded downwards into ordinal or nominal 4. LEGAL REQUIREMENTS
measurements (but not conversely).
− Banks must count all the cash in bank teller
• For example, recode systolic blood pressure as drawers at the end of each business dat. The U.S.
“normal” (under 130), “elevated’ (130 to 140), or Congress forbade sampling in the 2000 decennial
“high” (over 140).
population census.
2.3 SAMPLING CONCEPTS
PARAMETER OR STATISTIC?
POPULATION OR SAMPLE OR CENSUS?
❖ Statistic is a numerical value computed from a
▪ POPULATION
sample
− Involves all of the items one is interested in. It ❖ Statistics can be used as estimates of parameters
maybe FINITE (e.g., all of the passengers on a found in the population
plane) or effectively INFINITE (e.g., all of the ❖ Symbols are used to represent population
Cokes produced in an ongoing bottling process). parameters and sample statistics.
❖ From a sample of n items, chosen from a
▪ SAMPLE population, we compute statistics that can be used
− A subset of the population and involves looking as estimates of parameters found in the
only at some of the items selected from the population.
population.
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 ❖ To avoid confusion, we use different symbols for
each parameter and its corresponding statistic.
TARGET POPULATION
− The population must be carefully specified and the
sample must be drawn scientifically so that the
sample is representative.
− The target population is the population we are
interested in (e.g., U.S. gasoline prices).
− The sampling frame is the group from which we
take the sample (e.g., 115 000 stations).
− The frame should not differ from the target
population.
2.4 SAMPLING METHODS
RANDOM SAMPLING METHODS
Simple Random Sample Use random numbers to
select items from a list
(e.g., VISA cardholders).
Systematic Sample Select every kth item from
a list or sequence (e.g.,
restaurant customers).
Stratified Sample Select randomly within
defined strata (e.g., by age,
occupation, gender).
Cluster Sample Select random
geographical regions (e.g.,
zip codes) that represent
the population.
SIMPLE RANDOM SAMPLE
− We usually denote the population size by N and
the sample size by n.
− In a simple random sample, every item in the
population of N items has the same chance of
being chosen in the sample of n items.
− A physical experiment to accomplish this would be
to write each of the N data values on a poker chip,
and then to draw n chips from a bowl after stirring
it thoroughly.
SAMPLING WITH OR WITHOUT REPLACEMENT
− With the advent of technology, random samples
can easily be generated.
− If we do not allow duplicates when sampling, then
we are sampling without replacement.
− If we do allow duplicates when sampling, then we
are sampling with replacement.
− When should we worry about sampling without
replacement? Only when the population is FINITE
and the sample size is close to the population size.
− Take note that a common criterion that is a finite
population is EFFECTIVELY INFINITE if the
sample is less than 5% of the population.
− An equivalent statement is that a population is
EFFECTIVELY INFINITE when it is at least 20
times as large as the sample.
CLUSTER SAMPLE
− Strata consist of geographical regions
− One-stage cluster sampling – sample consists of all
elements in each of k randomly chosen subregions
(clusters).
− two-stage cluster sampling – first choose k
subregions (clusters), then choose a random
sample of elements within each cluster.
NONRANDOM SAMPLING METHODS
Judgement Use expert knowledge to choose “typical “
Sample items (e.g., which employees to
interview).
Convenience Use a sample that happens to be available
Sample (e.g., ask coworkers’ opinions at lunch.
Focus In-depth dialog with a representative
groups panel of individuals (e.g., iPod users).
OTHER DATA COLLECTION METHODS
• Businesses now have many other methods for
collecting data with the use of technology.
• Point-of-sale (POS) systems can collect real-time
data on purchases at retail or convenience stores,
restaurants, and gas stations.
• Many companies use loyalty cards that are swiped
during the purchase. These loyalty cards have the
customer’s information, which can be matched to
the purchases just made.
• Businesses also send out e-mail surveys to loyal
customers on a regular basis to get feedback on
their products and services.
• Facebook can track your Internet searches using
its software algorithms.
• Google also tracks Internet searches and provides
these data through its Google Analytics services.
SAMPLE SIZE
− The necessary sample size depends on the
Internet variability of the quantity being
measured and the desired precision of the
estimate
− For example, the caffeine content of Mountain
Dew is fairly consistent because each can or bottle
is filled at the factory, so a small sample size
would suffice to estimate the mean.
− In contrast, the amount of caffeine in an
individually brewed cup of Bigelow Raspberry
Royale tea varies widely because people let it
steep for varying lengths of time, so a larger
sample would be needed to estimate a mean.
SOURCES OF ERROR OR BIAS
SOURCES OF ERROR CHARACTERISTICS
Nonresponse Bias Respondents differ from
non-respondents
Selection Bias Self-selected respondents
are atypical
Response Error Respondents give false
information
Coverage Error Incorrect specification of
frame or population
Measurement Error Unclear survey instrument
wording
Interview Error Responses influenced by
interviewer
Sampling Error Random and unavoidable
2.5 SURVEYS
BASIC STEPS OF SURVEY RESEARCH
I. State the goal of the research.
II. Develop the budget (time, money, staff).
III. Create a research design (target population,
frame, sample size).

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 IV. Choose a survey type and method of
administration.
V. Design a data collection instrument
(questionnaire).
VI. Pretest the survey instrument and revise as
needed.
VII. Administer the survey (follow-up if needed).
VIII. Code the data and analyze it.
FIVE GENERAL CATEGORIES OF SURVEYS
SURVEY CHARACTERISTICS
TYPE
Mail Mail requires a well-targeted and current
mailing list (people move a lot). Expect a
low response rates and nonresponse bias
(non-respondents differ from those who
respond). Zip code lists (often costly) are
and attractive option to define strata of
similar income, education, and attitudes.
To encourage participation, a cover letter
should explain the uses of survey data.
Plan for follow-up mailings.
Telephone Random dialing yields low response and is
poorly targeted. Purchased phone lists
help reach the target population, through a
low response rate still is typical
(disconnected phones, caller screening,
answering machines, work hours, no-call
lists). Other sources of nonresponse bias
include the growing number of cellphones,
non-English speakers, and distrust caused
by scams.
Interviews Interviewing is expensive and time-
consuming, yet a trade-off between sample
size for high-quality results may be worth
it. Interviewers must be well-trained − an
added cost. Interviewers can obtain
information on complex or sensitive topics
(e.g., gender discrimination in companies,
birth control practices, diet and exercise).
Web Web surveys are growing in popularity but
are subject to non-response bias because
they miss those who feel too busy, don’t
own computers, or distrust your motives
(spams and scams). This type of survey
works best when targeted to a well-
defined interest group on a question of
self-interest).
Direct Observation can be done in a controlled
Observation setting (e.g., psychology lab) but requires
informed consent, which can change
behavior. Unobtrusive observation is
possible in some non-lab settings.
TYPES OF QUESTIONS
• Open-ended
• Fill-in-the-blank
• Check boxes
• Ranked choices
• Pictograms
• Likert Scale
REQUISITES OF A QUESTIONNAIRE
− A lot of white space in the layout
− A short, clear instructions as a beginning
− The purpose of having the survey
− Anonymity of the respondents
− Covered all possible choices
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DATA QUALITY
− Responses are usually coded numerically (e.g., 1=
male, 2 = female).
− Missing values are typically denoted by special
characters (e.g., blank, “.” or “*”).
− Discard questionnaires that are flawed or missing
many responses.
− Watch for multiple responses, outrageous or
inconsistent replies, or out-of-range answers.
− Follow up if necessary and always document your
data coding decisions.
SURVEY SOFTWARE
− Designing and creating a survey is much easier
than it used to be.
− Software is available that automates much of the
process, allowing you to use different question
formats, skip questions and move to a new
section, easily visualize the layout, and other
features.
− Because most surveys are now administered
online, survey software also includes features that
allow the respondent to remain anonymous if
warranted and prevent respondents from taking
the survey twice.
NOTES FROM OTHER SOURCES:
RANDOM VARIABLE
− a variable whose values depend on the outcomes
of an experiment
− a function that maps the outcome of an
experiment to real numbers
− usually denoted by an uppercase letter of the
alphabet and its possible values are denoted with
the corresponding lowercase letter
− different from variables in Algebra, the values that
a random variable can assume are associated with
specific probabilities and will vary from one trial
to another of a random experiment
DISCRETE RANDOM VARIABLE
− a random variable that can take only countable
values
− its set of possible values is in one-to-one
correspondence with a subset of natural numbers
− the values that a discrete random variable can
assume are called mass points
CONTINUOUS RANDOM VARIABLE
− a random variable that takes an unaccountably
infinites number of values as a result of
measurement
− its set of possible values is from any range of real
numbers
❖ Every sample point in a given experiment can be
associated with a specific value of a random
variable. Since an event is made up of sample
points, it is not difficult to see that any event can
be described by specifying a value or range of
values of a random variable. Hence the probability
of an event corresponds to the probability that a
random variable will assume one or more of its
possible values.
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