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21 views46 pages

Quantitative Methods Course Taster

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Jerwin Taguinod
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Quantitative

Methods
Professor David Targett

QM-A3-engb 1/2016 (1022)


This course text is part of the learning content for this Edinburgh Business School course.
In addition to this printed course text, you should also have access to the course website in this subject,
which will provide you with more learning content, the Profiler software and past examination questions
and answers.
The content of this course text is updated from time to time, and all changes are reflected in the version
of the text that appears on the accompanying website at http://coursewebsites.ebsglobal.net/.
Most updates are minor, and examination questions will avoid any new or significantly altered material for
two years following publication of the relevant material on the website.
You can check the version of the course text via the version release number to be found on the front
page of the text, and compare this to the version number of the latest PDF version of the text on the
website.
If you are studying this course as part of a tutored programme, you should contact your Centre for
further information on any changes.
Full terms and conditions that apply to students on any of the Edinburgh Business School courses are
available on the website www.ebsglobal.net, and should have been notified to you either by Edinburgh
Business School or by the centre or regional partner through whom you purchased your course. If this is
not the case, please contact Edinburgh Business School at the address below:

Edinburgh Business School


Heriot-Watt University
Edinburgh
EH14 4AS
United Kingdom

Tel + 44 (0) 131 451 3090


Fax + 44 (0) 131 451 3002
Email [email protected]
Website www.ebsglobal.net

The courses are updated on a regular basis to take account of errors, omissions and recent
developments. If you'd like to suggest a change to this course, please contact
us: [email protected].
Quantitative Methods
The Quantitative Methods programme is written by David Targett, Professor of Information Systems at
the School of Management, University of Bath and formerly Senior Lecturer in Decision Sciences at the
London Business School. Professor Targett has many years’ experience teaching executives to add
numeracy to their list of management skills and become balanced decision makers. His style is based on
demystifying complex techniques and demonstrating clearly their practical relevance as well as their
shortcomings. His books, including Coping with Numbers and The Economist Pocket Guide to Business
Numeracy, have stressed communication rather than technical rigour and have sold throughout the world.
He has written over fifty case studies which confirm the increasing integration of Quantitative Methods
with other management topics. The cases cover a variety of industries, illustrating the changing nature of
Quantitative Methods and the growing impact it is having on decision makers in the Information Technol-
ogy age. They also demonstrate Professor Targett’s wide practical experience in international
organisations in both public and private sectors.
One of his many articles, a study on the provision of management information, won the Pergamon Prize
in 1986.
He was part of the team that designed London Business School’s highly successful part-time MBA
Programme of which he was the Director from 1985 to 1988. During this time he extended the interna-
tional focus of the teaching by leading pioneering study groups to Hong Kong, Singapore and the United
States of America. He has taught on all major programmes at the London Business School and has
developed and run management education courses involving scores of major companies including:
British Rail
Citicorp
Marks and Spencer
Shell
First Published in Great Britain in 1990.
© David Targett 1990, 2000, 2001
The rights of Professor David Targett to be identified as Author of this Work has been asserted in
accordance with the Copyright, Designs and Patents Act 1988.
All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise
without the prior written permission of the Publishers. This book may not be lent, resold, hired out or
otherwise disposed of by way of trade in any form of binding or cover other than that in which it is
published, without the prior consent of the Publishers.
Contents

PART 1 INTRODUCTION AND BACKGROUND


Module 1 Introducing Statistics: Some Simple Uses and Misuses 1/1

1.1 Introduction 1/1


1.2 Probability 1/3
1.3 Discrete Statistical Distributions 1/5
1.4 Continuous Statistical Distributions 1/8
1.5 Standard Distributions 1/11
1.6 Wrong Use of Statistics 1/16
1.7 How to Spot Statistical Errors 1/20
Learning Summary 1/22
Review Questions 1/24
Case Study 1.1: Airline Ticketing 1/26
Case Study 1.2: JP Carruthers Co. 1/26
Case Study 1.3: Newspaper Letters 1/30

Module 2 Basic Mathematics: School Mathematics Applied to Management 2/1

2.1 Introduction 2/1


2.2 Graphical Representation 2/2
2.3 Manipulation of Equations 2/8
2.4 Linear Functions 2/11
2.5 Simultaneous Equations 2/14
2.6 Exponential Functions 2/18
Review Questions 2/25
Case Study 2.1: Algebraic Formulation 2/28
Case Study 2.2: CNX Armaments Co. 2/29
Case Study 2.3: Bonzo Corporation 2/29
Case Study 2.4: Woof Dog Food 2/29

PART 2 HANDLING NUMBERS


Module 3 Data Communication 3/1

3.1 Introduction 3/1


3.2 Rules for Data Presentation 3/3
3.3 The Special Case of Accounting Data 3/12
3.4 Communicating Data through Graphs 3/16
Learning Summary 3/21

Quantitative Methods Edinburgh Business School v


Contents

Review Questions 3/22


Case Study 3.1: Local Government Performance Measures 3/24
Case Study 3.2: Multinational Company’s Income Statement 3/25
Case Study 3.3: Country GDPs 3/25
Case Study 3.4: Energy Efficiency 3/26

Module 4 Data Analysis 4/1

4.1 Introduction 4/1


4.2 Management Problems in Data Analysis 4/2
4.3 Guidelines for Data Analysis 4/6
Learning Summary 4/15
Review Questions 4/16
Case Study 4.1: Motoring Correspondent 4/17
Case Study 4.2: Geographical Accounts 4/18
Case Study 4.3: Wages Project 4/19

Module 5 Summary Measures 5/1

5.1 Introduction 5/1


5.2 Usefulness of the Measures 5/2
5.3 Measures of Location 5/5
5.4 Measures of Scatter 5/14
5.5 Other Summary Measures 5/20
5.6 Dealing with Outliers 5/22
5.7 Indices 5/22
Learning Summary 5/29
Review Questions 5/30
Case Study 5.1: Light Bulb Testing 5/33
Case Study 5.2: Smith’s Expense Account 5/34
Case Study 5.3: Monthly Employment Statistics 5/34
Case Study 5.4: Commuting Distances 5/34
Case Study 5.5: Petroleum Products 5/35

Module 6 Sampling Methods 6/1

6.1 Introduction 6/1


6.2 Applications of Sampling 6/3
6.3 The Ideas behind Sampling 6/3
6.4 Random Sampling Methods 6/4
6.5 Judgement Sampling 6/10
6.6 The Accuracy of Samples 6/12

vi Edinburgh Business School Quantitative Methods


Contents

6.7 Typical Difficulties in Sampling 6/13


6.8 What Sample Size? 6/15
Learning Summary 6/16
Review Questions 6/18
Case Study 6.1: Business School Alumni 6/20
Case Study 6.2: Clearing Bank 6/20

PART 3 STATISTICAL METHODS


Module 7 Distributions 7/1

7.1 Introduction 7/1


7.2 Observed Distributions 7/2
7.3 Probability Concepts 7/8
7.4 Standard Distributions 7/14
7.5 Binomial Distribution 7/15
7.6 The Normal Distribution 7/19
Learning Summary 7/27
Review Questions 7/29
Case Study 7.1: Examination Grades 7/31
Case Study 7.2: Car Components 7/31
Case Study 7.3: Credit Card Accounts 7/32
Case Study 7.4: Breakfast Cereals 7/32

Module 8 Statistical Inference 8/1

8.1 Introduction 8/1


8.2 Applications of Statistical Inference 8/2
8.3 Confidence Levels 8/2
8.4 Sampling Distribution of the Mean 8/3
8.5 Estimation 8/6
8.6 Basic Significance Tests 8/9
8.7 More Significance Tests 8/18
8.8 Reservations about the Use of Significance Tests 8/24
Learning Summary 8/26
Review Questions 8/28
Case Study 8.1: Food Store 8/30
Case Study 8.2: Management Association 8/31
Case Study 8.3: Textile Company 8/31
Case Study 8.4: Titan Insurance Company 8/31

Quantitative Methods Edinburgh Business School vii


Contents

Module 9 More Distributions 9/1

9.1 Introduction 9/1


9.2 The Poisson Distribution 9/2
9.3 Degrees of Freedom 9/7
9.4 t-Distribution 9/8
9.5 Chi-Squared Distribution 9/14
9.6 F-Distribution 9/19
9.7 Other Distributions 9/22
Learning Summary 9/23
Review Questions 9/25
Case Study 9.1: Aircraft Accidents 9/28
Case Study 9.2: Police Vehicles 9/28

Module 10 Analysis of Variance 10/1

10.1 Introduction 10/1


10.2 Applications 10/2
10.3 One-Way Analysis of Variance 10/5
10.4 Two-Way Analysis of Variance 10/10
10.5 Extensions of Analysis of Variance 10/13
Learning Summary 10/14
Review Questions 10/15
Case Study 10.1: Washing Powder 10/16
Case Study 10.2: Hypermarkets 10/17

PART 4 STATISTICAL RELATIONSHIPS


Module 11 Regression and Correlation 11/1

11.1 Introduction 11/1


11.2 Applications 11/3
11.3 Mathematical Preliminaries 11/4
11.4 Simple Linear Regression 11/7
11.5 Correlation 11/9
11.6 Checking the Residuals 11/13
11.7 Regression on a Computer 11/15
11.8 Some Reservations about Regression and Correlation 11/19
Learning Summary 11/22
Review Questions 11/23
Case Study 11.1: Railway Booking Offices 11/25
Case Study 11.2: Department Store Chain 11/26

viii Edinburgh Business School Quantitative Methods


Contents

Module 12 Advanced Regression Analysis 12/1

12.1 Introduction 12/1


12.2 Multiple Regression Analysis 12/2
12.3 Non-linear Regression Analysis 12/6
12.4 Statistical Basis of Regression and Correlation 12/12
12.5 Regression Analysis Summary 12/22
Learning Summary 12/23
Review Questions 12/26
Case Study 12.1: CD Marketing 12/28
Case Study 12.2: Scrap Metal Processing I 12/29
Case Study 12.3: Scrap Metal Processing II 12/30

PART 5 BUSINESS FORECASTING


Module 13 The Context of Forecasting 13/1

13.1 Introduction 13/1


13.2 A Review of Forecasting Techniques 13/2
13.3 Applications 13/3
13.4 Qualitative Forecasting Techniques 13/5
Learning Summary 13/16
Review Questions 13/18
Case Study 13.1: Automobile Design 13/19

Module 14 Time Series Techniques 14/1

14.1 Introduction 14/1


14.2 Where Time Series Methods Are Successful 14/2
14.3 Stationary Series 14/2
14.4 Series with a Trend 14/6
14.5 Series with Trend and Seasonality 14/8
14.6 Series with Trend, Seasonality and Cycles 14/8
14.7 Review of Time Series Techniques 14/15
Learning Summary 14/17
Review Questions 14/18
Case Study 14.1: Interior Furnishings 14/20
Case Study 14.2: Garden Machinery Manufacture 14/21
Case Study 14.3: McClune and Sons 14/21

Quantitative Methods Edinburgh Business School ix


Contents

Module 15 Managing Forecasts 15/1

15.1 Introduction 15/1


15.2 The Manager’s Role in Forecasting 15/2
15.3 Guidelines for an Organisation’s Forecasting System 15/4
15.4 Forecasting Errors 15/13
Learning Summary 15/15
Review Questions 15/17
Case Study 15.1: Interior Furnishings 15/19
Case Study 15.2: Theatre Company 15/19
Case Study 15.3: Brewery 15/19

Appendix 1 Statistical Tables A1/1


Appendix 2 Examination Formulae Sheet A2/1
Short-Cut Formula 2/1
Binomial Distribution 2/1
Estimation 2/1
Poisson Distribution 2/2
Normal Distribution 2/2
t-Distribution 2/2
Chi-Squared Distribution 2/2
F-Distribution 2/2
One-Way Analysis of Variance 2/3
Two-Way Analysis of Variance 2/3
Regression 2/3
Correlation Coefficient 2/3
Runs Test 2/3
Exponential Smoothing 2/3
Holt’s Method 2/4
Mean Square Error 2/4

Appendix 3 Practice Final Examinations A3/1


Practice Final Examination 1 3/2
Practice Final Examination 2 3/12

Appendix 4 Answers to Review Questions A4/1


Module 1 4/1
Module 2 4/6
Module 3 4/12
Module 4 4/18
Module 5 4/23

x Edinburgh Business School Quantitative Methods


Contents

Module 6 4/31
Module 7 4/37
Module 8 4/45
Module 9 4/53
Module 10 4/59
Module 11 4/66
Module 12 4/72
Module 13 4/79
Module 14 4/85
Module 15 4/96

Index I/1

Quantitative Methods Edinburgh Business School xi


PART 1

Introduction and Background


Module 1 Introducing Statistics: Some Simple Uses and
Misuses
Module 2 Basic Mathematics: School Mathematics
Applied to Management

Quantitative Methods Edinburgh Business School


Module 1

Introducing Statistics: Some Simple


Uses and Misuses
Contents
1.1 Introduction.............................................................................................1/1
1.2 Probability ...............................................................................................1/3
1.3 Discrete Statistical Distributions ..........................................................1/5
1.4 Continuous Statistical Distributions .....................................................1/8
1.5 Standard Distributions ........................................................................ 1/11
1.6 Wrong Use of Statistics ...................................................................... 1/16
1.7 How to Spot Statistical Errors ........................................................... 1/20
Learning Summary ......................................................................................... 1/22
Review Questions ........................................................................................... 1/24
Case Study 1.1: Airline Ticketing ................................................................. 1/26
Case Study 1.2: JP Carruthers Co. ............................................................... 1/26
Case Study 1.3: Newspaper Letters ............................................................. 1/30

Prerequisite reading: None

Learning Objectives
This module gives an overview of statistics, introducing basic ideas and concepts at
a general level, before dealing with them in greater detail in later modules. The
purpose is to provide a gentle way into the subject for those without a statistical
background, in response to the cynical view that it is not possible for anyone to read
a statistical text unless they have read it before. For those with a statistical back-
ground, the module will provide a broad framework for studying the subject.

1.1 Introduction
The word statistics can refer to a collection of numbers or it can refer to the
science of studying collections of numbers. Under either definition the subject has
received far more than its share of abuse (‘lies, damned lies…’). A large part of the
reason for this may well be the failure of people to understand that statistics is like a
language. Just as verbal languages can be misused (for example, by politicians and
journalists?) so the numerical language of statistics can be misused (by politicians
and journalists?). To blame statistics for this is as sensible as blaming the English
language when election promises are not kept.

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Module 1 / Introducing Statistics: Some Simple Uses and Misuses

One does not have to be skilled in statistics to misuse them deliberately (‘figures
can lie and liars can figure’), but misuses often remain undetected because fewer
people seem to have the knowledge and confidence to handle numbers than have
similar abilities with words. Fewer people are numerate than are literate. What is
needed to see through the misuse of statistics, however, is common sense with the
addition of only a small amount of technical knowledge.
The difficulties are compounded by the unrealistic attitudes of those who do
have statistical knowledge. For instance, when a company’s annual accounts report
that the physical stock level is £34 236 417 (or even £34 236 000), it conveys an aura
of truth because the figure is so precise. Accompanying the accountants who
estimated the figure, one may have thought that the method by which the data were
collected did not warrant such precision. For market research to say that 9 out of 10
dogs prefer Bonzo dog food is also misleading, but in a far more overt fashion. The
statement is utterly meaningless, as is seen by asking the questions: ‘Prefer it to
what?’, ‘Prefer it under what circumstances?’, ‘9 out of which 10 dogs?’
Such examples and many, many others of greater or lesser subtlety have generat-
ed a poor reputation for statistics which is frequently used as an excuse for
remaining in ignorance of it. Unfortunately, it is impossible to avoid statistics in
business. Decisions are based on information; information is often in numerical
form. To make good decisions it is necessary to organise and understand numbers.
This is what statistics is about and this is why it is important to have some
knowledge of the subject.
Statistics can be split into two parts. The first part can be called descriptive
statistics. Broadly, this element handles the problem of sorting a large amount of
collected data in ways which enable its main features to be seen immediately. It is
concerned with turning numbers into real and useful information. Included here are
simple ideas such as organising and arranging data so that their patterns can be seen,
summarising data so that they can be handled more easily and communicating data
to others. Also included is the now very important area of handling computerised
business statistics as provided by management information systems and decision
support systems.
The second part can be referred to broadly as inferential statistics. This element
tackles the problem of how the small amount of data that has been collected (called
the sample) may be analysed to infer general conclusions about the total amount of
similar data that exist uncollected in the world (called the population). For instance,
opinion polls use inferential statistics to make statements about the opinions of the
whole electorate of a country, given the results of perhaps just a few hundred
interviews.
Both types of statistics are open to misuse. However, with a little knowledge and
a great deal of common sense, the errors can be spotted and the correct procedures
seen. In this module the basic concepts of statistics will be introduced. Later, some
abuses of statistics and how to counter them will be discussed.
The first basic concept to look at is that of probability, which is fundamental to
statistical work. Statistics deals with approximations and ‘best guesses’ because of
the inaccuracy and incompleteness of most of the data used. It is rare to make

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Module 1 / Introducing Statistics: Some Simple Uses and Misuses

statements and draw conclusions with certainty. Probability is a way of quantifying


the strength of belief in the information derived and the conclusions drawn.

1.2 Probability
All future events are uncertain to some degree. That the present government will
still be in power in the UK in a year’s time (given that it is not an election year) is
likely, but far from certain; that a communist government will be in power in a
year’s time is highly unlikely, but not impossible. Probability theory enables the
difference in the uncertainty of events to be made more precise by measuring their
likelihood on a scale.

Impossible Evens Certain


0 0.5 1

Lifting oneself by A new-born baby There will be at least


one's own bootlaces being male one car accident in
London during the next year

Figure 1.1 Probability scale


The scale is shown in Figure 1.1. At one extreme, impossible events (e.g. that you
could swim the Atlantic) have probability zero. At the other extreme, completely
certain events (e.g. that you will one day die) have probability one. In between are
placed all the neither certain nor impossible events according to their likelihood. For
instance, the probability of obtaining a head on one spin of an unbiased coin is 0.5;
the probability of one particular ticket winning a raffle in which there are 100 tickets
is 0.01.
As a shorthand notation ‘the probability of an event A is 0.6’ is written in this
way:
(A) = 0.6

1.2.1 Measurement of Probability


There are three methods of calculating a probability. The methods are not alterna-
tives since for certain events only one particular method of measurement may be
possible. However, they do provide different conceptual ways of viewing probabil-
ity. This should become clear as the methods are described.
(a) A priori approach. In this method the probability of an event is calculated by a
process of logic. No experiment or judgement is required. Probabilities involving
coins, dice and playing cards can fall into this category. For example, the proba-
bility of a coin landing ‘heads’ can be calculated by noting that the coin has two
sides, both of which are equally likely to fall upwards (pedants, please note: as-
sume it will not come to rest on its rim). Since the coin must fall with one side
upwards, the two events must share equally the total probability of 1.0. There-
fore:

Quantitative Methods Edinburgh Business School 1/3


Module 1 / Introducing Statistics: Some Simple Uses and Misuses

(Heads) = 0.5
(Tails) = 0.5
(b) ‘Relative frequency’ approach. When the event has been or can be repeated a
large number of times, its probability can be measured from the formula:
.
(Event) =
.
For example, to estimate the probability of rain on a given day in September in
London, look at the last 10 years’ records to find that it rained on 57 days. Then:
.
(Rain) =
. ( × )

=
= 0.19
(c) Subjective approach. A certain group of statisticians (Bayesians) would argue
that the degree of belief that an individual has about a particular event may be
expressed as a probability. Bayesian statisticians argue that in certain circum-
stances a person’s subjective assessment of a probability can and should be used.
The traditional view, held by classical statisticians, is that only objective probabil-
ity assessments are permissible. Specific areas and techniques that use subjective
probabilities will be described later. At this stage it is important to know that
probabilities can be assessed subjectively but that there is discussion amongst
statisticians as to the validity of doing so. As an example of the subjective ap-
proach, let the event be the achievement of political unity in Europe by the year
2020 AD. There is no way that either of the first two approaches could be em-
ployed to calculate this probability. However, an individual can express his own
feelings on the likelihood of this event by comparing it with an event of known
probability: for example, is it more or less likely than obtaining a head on the
spin of a coin? After a long process of comparison and checking, the result
might be:
(Political unity in Europe by 2020 AD) = 0.10
The process of accurately assessing a subjective probability is a field of study in
its own right and should not be regarded as pure guesswork.
The three methods of determining probabilities have been presented here as an
introduction and the approach has not been rigorous. Once probabilities have been
calculated by whatever method, they are treated in exactly the same way.
Examples
1. What is the probability of throwing a six with one throw of a die?
With the a priori approach there are six possible outcomes: 1, 2, 3, 4, 5 or 6 show-
ing. All outcomes are equally likely. Therefore:
(throwing a 6) =
2. What is the probability of a second English Channel tunnel for road vehicles being
completed by 2025 AD?
The subjective approach is the only one possible, since logical thought alone cannot
lead to an answer and there are no past observations. My assessment is a small one,
around 0.02.
3. How would you calculate the probability of obtaining a head on one spin of a biased
coin?

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Module 1 / Introducing Statistics: Some Simple Uses and Misuses

The a priori approach may be possible if one had information on the aerodynamical
behaviour of the coin. A more realistic method would be to conduct several trial
spins and count the number of times a head appeared:
.
(obtaining a head) =
.
4. What is the probability of drawing an ace in one cut of a pack of playing cards?
Use the a priori method. There are 52 possible outcomes (one for each card in the
deck) and the probability of picking any one card, say the ace of diamonds, must
therefore be 1/52. There are four aces in the deck, hence:
(drawing an ace) = =

1.3 Discrete Statistical Distributions


Probability makes it possible to study another essential element of statistical work: the
statistical distribution. It can be thought of either as one of the first steps in descrip-
tive statistics or, alternatively, as a cornerstone of inferential statistics. It will first be
developed as a descriptive technique. Suppose there is a collection of data, which
initially might appear as in Figure 1.2.

53
66
41 71 40
110
83 106

72
20
99 92

75

Figure 1.2 USA sales data


The numbers are all measurements of a variable. A variable is just what the word
implies. It is some entity which can be measured and for which the measurement
varies when several observations are made. The variable might be the number of
serious crimes in each French département or the heights of all 20-year-old males in
Sweden. Figure 1.2 shows the annual sales (in thousands) of a brand of tinned
sweetcorn in different sales regions of the USA. The numbers are referred to as
observations or data points.
It is little more than a mess. A mess can take on different forms, of course. The
first sight of a particular set of data may be a pile of dusty production dockets or it
may be a file of handwritten invoices, but it is always likely to be some sort of mess.
A first attempt to sort it out might be to arrange the numbers in order as in
Table 1.1.

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Module 1 / Introducing Statistics: Some Simple Uses and Misuses

Table 1.1 Columns of numbers


. 52 59 66
. 54 60 66
41 55 60 .
43 56 60 .
45 57 61 .
46 57 62 .
48 58 62
49 58 63
49 58 65
50 59 65

Table 1.1 is an ordered array. The numbers look neater now but it is still not
possible to get a feel for the data (the average, for example) as they stand. The next
step is to classify the data and then arrange the classes in order. Classifying means
grouping the numbers in bands (e.g. 50–54) to make them easier to handle. Each
class has a frequency, which is the number of data points that fall within that class.
This is called a frequency table and is shown in Table 1.2. This shows that seven
data points were greater than or equal to 40 but less than 50, 12 were greater than or
equal to 50 but less than 60 and so on. There were 100 data points in all.

Table 1.2 A frequency table


Class Frequency
40 ≤ x < 50 7
50 ≤ x < 60 12
60 ≤ x < 70 22
70 ≤ x < 80 27
80 ≤ x < 90 19
90 ≤ x < 100 10
100 ≤ x < 110 3
Total frequency 100
Note: ≤ means ‘less than or equal to’; < means ‘less than’.

It is now much easier to get an overall conception of what the data mean. For
example, most of the numbers are between 60 and 90 with extremes of 40 and 110.
Of course, it is likely that at some time there may be a need to perform detailed
calculations with the numbers to provide specific information, but at present the
objective is merely to get a feel for the data in the shortest possible time. Another
arrangement with greater visual impact, called a frequency histogram, will help
meet this objective.

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Module 1 / Introducing Statistics: Some Simple Uses and Misuses

30
27

22

Frequency
20 19

12
10
10 7
3

10 20 30 40 50 60 70 80 90 100 110 120 130

Figure 1.3 A frequency histogram


The transition from Table 1.2 to Figure 1.3 is simple and obvious, yet with the
frequency histogram one can see immediately what the data are like. The numbers
are spread symmetrically over a range from 40 to just over 100 with the majority
falling around the centre of the range.
As a descriptive device the frequency histogram works well and it is not necessary
to refine it further. If, on the other hand, there are analytical objectives, the histo-
gram of Figure 1.3 would be developed into a statistical distribution. To be strictly
accurate, all configurations dealt with are statistical distributions, but it is the most
manageable and generally accepted version that is sought.
To carry out this development, notice first the connection between frequencies
and probabilities via the ‘relative frequency’ approach to probability calculations.
The probability that any randomly selected measurement lies within a particular
class interval can be calculated as follows:
(number lies within class ) =

e.g.
(40 ≤ < 50) = = 0.07

The frequency histogram can then be turned into a probability histogram by


writing the units of the vertical axis as probabilities (as calculated above) instead of
frequencies. The shape of the histogram would remain unaltered. Once the histo-
gram is in the probability form it is usually referred to as a distribution, in this case
a discrete distribution. A variable is discrete if it is limited in the values it can take.
For example, when the data are restricted to classes (as above) the variable is
discrete. Also, when a variable is restricted to whole numbers only (an integer
variable), it is discrete.
The probability histogram makes it easier to work out the probabilities associated
with amalgams of classes. For instance, if the probabilities of two of the classes are:
(50 ≤ < 60) = 0.12
(60 ≤ < 70) = 0.22

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Module 1 / Introducing Statistics: Some Simple Uses and Misuses

then:
(50 ≤ < 70) = 0.12 + 0.22
= 0.34
This is true whether working in probabilities or the frequencies from which they
were derived.
Examples
From the data in Figure 1.3, what are the following probabilities?
1. (80 ≤ < 100)
2. ( < 70)
3. (60 ≤ < 100)
Answers
1.
(80 ≤ < 100) = (80 ≤ < 90) + (90 ≤ < 100)
= +
= 0.19 + 0.10
= 0.29
2.
( < 70) = ( ≤ 50) + (50 ≤ < 60) + (60 ≤ < 70)
= 0.07 + 0.12 + 0.22
= 0.41
3.
(60 ≤ < 100) = 0.22 + 0.27 + 0.19 + 0.10
= 0.78

1.4 Continuous Statistical Distributions


To summarise progress so far – there is a probability histogram of a variable, from
which can be determined the probability that any one measurement of the variable
will fall within one of the classes of the histogram. Such a distribution is a discrete
distribution. It is a distribution because the variable is distributed across a range of
values; it is discrete because the values the variables take are in steps rather than
smoothly following one another.
A continuous variable is not limited in the values it can take. It can be whole
numbers, and all values in between; it does not group data in classes, but distin-
guishes between numbers such as 41.73241 and 41.73242. The distribution formed
by a continuous variable is a continuous distribution. It can be thought of as an
extension of a discrete distribution. The extension process is as follows. (The
process is to illustrate the link between discrete and continuous distributions: it is
not a procedure that would ever need to be carried out in practice.)
A discrete distribution like Figure 1.3 is reproduced in Figure 1.4(a). The column
widths are progressively reduced. In (b) the column widths have been halved; for

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example, the class 50 ≤ x < 60 is divided into two classes, 50 ≤ x < 55 and
55 ≤ x < 60. In (c) the classes have been further subdivided. As the process contin-
ues, the distribution becomes smoother, until, ultimately, the continuous
distribution (d) will be achieved.

Variable classes (a) Variable classes (b)

50 60
Continuous variable (d) Variable classes (c)

Figure 1.4 Discrete to continuous


There is now a difficulty concerning the measurement of probabilities. In the
discrete distribution Figure 1.4(a), the probabilities associated with different values
of the variable were equal to the column height. If column heights continue to be
equal to probabilities, the process (a) → (b) → (c) → (d) would result in flatter and
flatter distributions. Figure 1.4(d) would be completely flat since the probability
associated with the now distinct values such as 41.73241 and 41.73242 must be
infinitesimally small. The problem is overcome by measuring probabilities in a
continuous distribution by areas. For example, P(50 ≤ x < 60) is the area under the
part of the curve between 50 and 60, and shaded in Figure 1.4(d).
The argument for using areas is this. In Figure 1.4(a) the column widths are all
the same; therefore probability could be measured just as well by area as by height.
Figure 1.5 gives an example of what happens in the move from (a) to (b), when the
classes are halved. It is supposed that the original data are such that the probabilities
for the new classes can be calculated from them.

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50 < x < 55
50 < x < 60
55 < x < 60

P (50 < x < 55) = 0.05


P (50 < x < 60) = 0.12
P (55 < x < 60) = 0.07

Area
0.12 Area Area
0.05 0.07

50 60 50 55 60

Figure 1.5 Reducing class sizes


Using areas to measure probabilities, the column heights of the new classes are
approximately the same as those of the original. The lower probabilities for the new
classes are reflected in the halving of the column widths, rather than changes in the
heights. As the subdivision process continues, there is no tendency for the distribu-
tion to become flatter. In this way a continuous distribution can have a definite
shape which can be interpreted in the same way as the shape of a discrete distribu-
tion, but its probabilities are measured from areas. Just as the column heights of a
discrete distribution sum to 1 (because each observation certainly has some value), so
the total area of a continuous distribution is 1.
The differences between discrete and continuous distributions are summarised in
Table 1.3.

Table 1.3 Differences between discrete and continuous distributions


Discrete Continuous
Variable limited to certain values Variable not limited
Shape is usually stepped Shape is usually smooth
Probabilities are equal to column heights Probabilities are equal to areas under
the curve
Sum of column heights = 1 Total area = 1

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Example

0.01 0.49 0.27 0.21 0.02

60 100 110 135

Figure 1.6 The area under each part of the curve is shown. The total
area is equal to 1.0
Using the continuous distribution in Figure 1.6, what are the probabilities that a
particular value of the variable falls within the following ranges?
1. ≤ 60
2. ≤ 100
3. 60 ≤ ≤ 110
4. ≥ 135
5. ≥ 110
Answers
1. ( ≤ 60) = 0.01
2. ( ≤ 100) = 0.01 + 0.49 = 0.5
3. (60 ≤ ≤ 110) = 0.49 + 0.27 = 0.76
4. ( ≥ 135) = 0.02
5. ( ≥ 110) = 0.21 + 0.02 = 0.23
In practice, the problems with the use of continuous distributions are, first, that
one can never collect sufficient data, sufficiently accurately measured, to
establish a continuous distribution. Second, were this possible, the accurate
measurement of areas under the curve would be difficult. Their greatest
practical use is where continuous distributions appear as standard distributions, a
topic discussed in the next section.

1.5 Standard Distributions


The distribution of US sales data shown in Figure 1.2, Table 1.1, Table 1.2 and
Figure 1.3 is an observed distribution. The data were collected, a histogram
formed and that was the distribution. A standard distribution has a theoretical,
rather than observational, base. It is a distribution that has been defined mathemati-
cally from a theoretical situation. The characteristics of the situation are expressed
mathematically and the resulting situation constructed theoretically. When an actual
situation resembling the theoretical one arises, the associated standard distribution is
applied.

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For example, one standard distribution, the normal, is derived from the follow-
ing theoretical situation. A variable is generated by a process which should give the
variable a constant value, but does not do so because it is subject to many small
disturbances. As a result, the variable is distributed around the central value (see
Figure 1.7). This situation (central value, many small disturbances) can be expressed
mathematically and the resulting distribution can be anticipated mathematically (i.e.
a formula describing the shape of the distribution can be found).

497 498 499 500 501 502 503


Average = 500 g

Figure 1.7 Normal distribution of weights of loaves of bread


If an actual situation appears to be like the theoretical, the normal distribution is
applied. Analysis, similar to the probability calculations with the USA sales data, can
then be carried out. Areas under parts of the curve can be found from the mathe-
matical formula or, more easily, from the normal curve tables. The normal
distribution would apply, for instance, to the lengths of machine-cut rods. The rods
should all be of the same length, but are not because of the variation introduced by
vibration, machine inaccuracies, the operator and other factors. A typical analysis
might be to calculate the percentage of production likely to be outside engineering
tolerances for the rods.
The normal distribution can be applied to many situations with similar character-
istics. Other standard distributions relate to situations with different characteristics.
Applying a standard distribution is an approximation. The actual situation is unlikely
to match exactly the theoretical one on which the mathematics were based. Howev-
er, this disadvantage is more than offset by the saving in data collection that the use
of a standard distribution brings about. Observed distributions often entail a great
deal of data collection. Not only must sufficient data be collected for the distribu-
tion to take shape, but also data must be collected individually for each and every
situation.
In summary, using an observed distribution implies that data have been collected
and histograms formed; using a standard distribution implies that the situation in
which data are being generated resembles closely a theoretical situation for which a
distribution has been constructed mathematically.

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1.5.1 The Normal Distribution


The normal distribution, one of the most common, is now investigated in more
detail. Figure 1.7 gives a rough idea of what it looks like in the case of weights of
bread loaves. The principal features are that it is symmetrical and bell-shaped; it has
just one hump (i.e. it is unimodal); the hump is at the average of the variable.
However, not all normal distributions are completely the same. Otherwise, they
could not possibly represent both the weights of bread loaves (with an average value
of 500 g and a spread of less than 10 g) and heights of male adults (with an average
of 1.75 m and a spread of around 0.40 m). All normal curves share a number of
common properties such as those mentioned above but they differ in that the
populations they describe have different characteristics. Two factors, called param-
eters, capture these characteristics and are sufficient to distinguish one normal
curve from another (and conversely specify exactly a normal curve). A parameter is
defined as a measure describing some aspect of a population.
The first parameter is the average or mean of the distribution. Although the
term ‘average’ has not been formally defined yet, it is no more than the expression
in everyday use (e.g. the average of 2 and 4 is 3). Two normal distributions differing
only by this parameter have precisely the same shape, but are located at different
points along a horizontal scale.
The second parameter is the standard deviation. Its precise definition will be
given later. It measures the dispersion, or spread, of the variable. In other words,
some variables are clustered tightly about the average (such as the bread loaves).
These distributions have a low standard deviation and their shape is narrow and
high. Variables that are spread a long way from the average have a high standard
deviation and their distribution is low and flat. Figure 1.8 shows examples of
distributions with high and low standard deviations: salaries in a hospital have a
large spread ranging from those for cleaners to those for consultants; salaries for
teaching staff at a school have a much smaller spread.
A further characteristic of a normal distribution is related to the standard devia-
tion (see Figure 1.9). The data refer to the weights of bread loaves with average
weight 500 g and standard deviation 2 g.
The property of the normal distribution illustrated in Figure 1.9 is derived from
the underlying mathematics, which are beyond the scope of this introduction. In any
case, it is more important to be able to use the normal distribution than to prove its
properties mathematically. The property applies whether the distribution is flat and
wide or high and narrow, provided only that it is normal. Given such a property, it is
possible to calculate the probabilities of events. The example below demonstrates
how a standard distribution (in this case the normal) can be used in statistical
analysis.

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(a)

£6000 £33 000 £60 000

(b)

£10 000 £19 000 £28 000

Figure 1.8 Salaries: (a) hospital – high standard deviation; (b) school –
low standard deviation

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68%

1s 1s

498 500 502


Weight (g)
68% of the distribution lies within ±1s of average
68% of bread loaves weigh between 498 g and 502 g

95%

2s 2s

496 500 504


Weight (g)
95% of the distribution lies within ±2s of average
95% of bread loaves weigh between 496 g and 504 g

99%

3s 3s

494 500 506


Weight (g)
99% of the distribution lies within ±3s of average
99% of bread loaves weigh between 494 g and 506 g

Figure 1.9 Characteristics of the standard deviation (s) in a normal


distribution

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Example
A machine is set to produce steel components of a given length. A sample of 1000
components is taken and their lengths measured. From the measurements the average
and standard deviation of all components produced are estimated to be 2.96 cm and
0.025 cm respectively. Within what limits would 95 per cent of all components pro-
duced by the machine be expected to lie?
Take the following steps:
1. Assume that the lengths of all components produced follow a normal distribution.
This is reasonable since this situation is typical of the circumstances in which normal
distributions arise.
2. The parameters of the distribution are the average mean = 2.96 cm and the standard
deviation = 0.025 cm. The distribution of the lengths of the components will there-
fore be as in Figure 1.10.

95%

2.91 2.96 3.01

Figure 1.10 Distribution of lengths of steel components


There is a difference between the distribution of all components produced by the
machine (the distribution of the population) and the distribution of the lengths of
components in the sample. It is the former distribution which is of interest and
which is shown in Figure 1.10. The sample has been used to estimate the parame-
ters.
3. From the properties of the normal distribution stated above, 95 per cent of the
distribution of the population (and therefore 95 per cent of all components pro-
duced) will be within two standard deviations of the average. Limits are 2.96 − (2 ×
0.025) and 2.96 + (2 × 0.025), which give 2.91 cm and 3.01 cm.
According to this estimate, 95 per cent of all production will lie between 2.91 cm
and 3.01 cm.

1.6 Wrong Use of Statistics


Statistics are misused whenever statistical evidence is presented in such a way that it
tends to lead to a false conclusion. The Advertising Standards Authority tries to
protect the public from misleading advertising, but the manager has no similar
protection against misleading management data. The presentation may mislead
accidentally or deliberately. In the latter case, the misuse of statistics can be a
creative art. Even so, it is possible to notice a few general types of misuse.

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1.6.1 Definitions
Statistical expressions and the variables themselves may not have precise definitions.
The user may assume the producer of the data is working with a different definition
than is the case. By assuming a wrong definition, the user will draw a wrong
conclusion. The statistical expression ‘average’ is capable of many interpretations. A
firm of accountants advertises in its recruiting brochure that the average salary of
qualified accountants in the firm is £44 200. A prospective employee may conclude
that financially the firm is attractive to work for. A closer look shows that the
accountants in the firm and their salaries are as follows:

3 partners £86 000


8 senior accountants £40 000
9 junior accountants £34 000

The average salary could be:


( × ) ( × ) ( × )
The mean = = £44 200
The ‘middle’ value = £40 000
The most frequent value = £34 000

All the figures could legitimately be said to be the average salary. The firm has
doubtless chosen the one that best suited its purposes. Even if it were certain that
the correct statistical definition was being used, it would still be necessary to ask just
how the variable (salary) is defined. Is share of profits included in the partners’
salaries? Are bonuses included in the accountants’ salaries? Are allowances (a car,
for example) included in the accountants’ salaries? If these items are removed, the
situation might be:

3 partners £50 000


8 senior accountants £37 000
9 junior accountants £32 400

The mean salary is now £36 880. Remuneration at this firm is suddenly not quite
so attractive.

1.6.2 Graphics
Statistical pictures are intended to communicate data very rapidly. This speed means
that first impressions are important. If the first impression is wrong then it is
unlikely to be corrected.
There are many ways of representing data pictorially, but the most frequently
used is probably the graph. If the scale of a graph is concealed or not shown at all,
the wrong conclusion can be drawn. Figure 1.11 shows the sales figures for a

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company over the last three years. The company would appear to have been
successful.

Sales

2013 2014 2015

Figure 1.11 Sales record (no scale)


However, no scales are shown. In fact, the sales record has been:

2013 £11 250 000


2014 £11 400 000
2015 £11 650 000

A more informative graph showing the scale is given in Figure 1.12. Sales have
hardly increased at all. Allowing for inflation, they have probably decreased in real
terms.

12

10
Sales (£ million)

2013 2014 2015

Figure 1.12 Sales record (with scale)

1.6.3 Sample Bias


Most statistical data are collected as a sample (i.e. they are just a small part of the
total data available (the population)). Conclusions drawn from the sample are
generalised to the population. The generalisation can be valid only to the extent that
the sample is representative. If the sample is not representative then the wrong
conclusions will be drawn. Sample bias can occur in three ways.

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First, it arises in the collection of the data. The left-wing politician who states that
80 per cent of the letters he receives are against a policy of the right-wing govern-
ment and concludes that a majority of all the electorate oppose the government on
this issue is drawing a conclusion from a biased sample.
Second, sample bias arises through the questions that elicit the data. Questions
such as ‘Do you go to church regularly?’ will provide unreliable information. There
may be a tendency for people to exaggerate their attendance since, generally, it is
regarded as a worthy thing to do. The word ‘regularly’ also causes problems. Twice a
year, at Christmas and Easter, is regular. So is twice every Sunday. It would be
difficult to draw any meaningful conclusions from the question as posed. The
question should be more explicit in defining regularity.
Third, the sample information may be biased by the interviewer. For example,
supermarket interviews about buying habits may be conducted by a young male
interviewer who questions 50 shoppers. It would not be surprising if the resultant
sample comprised a large proportion of young attractive females.
The techniques of sampling which can overcome most of these problems will be
described later in the course.

1.6.4 Omissions
The statistics that are not given can be just as important as those that are. A
television advertiser boasts that nine out of ten dogs prefer Bonzo dog food. The
viewer may conclude that 90 per cent of all dogs prefer Bonzo to any other dog
food. The conclusion might be different if it were known that:
(a) The sample size was exactly ten.
(b) The dogs had a choice of Bonzo or the cheapest dog food on the market.
(c) The sample quoted was the twelfth sample used and the first in which as many
as nine dogs preferred Bonzo.

1.6.5 Logical Errors


Statistics allows conclusions about numbers to be drawn. Usually, however, it is the
entities that lie behind the numbers that are of interest. Two of the most common
ways for logical errors to be made are as follows.
First, the numbers may not be the same as the entities. For example, employee
dissatisfaction is sometimes measured through staff turnover. It is the first that is
being studied, but the numbers measure the second. The two may not always
correspond. Financial analysts study the profit figures of companies in order to
judge the profitability of the company. Profit figures are, however, just accounting
measures and are no more than (hopefully, good) approximations to the ‘true
profitability’ of the company, which is difficult both to define and to measure.
Second, conclusions about the numbers do not necessarily imply causal effects in
the entities. For instance, there is a well-established relationship between the average
salary of clergymen and the price of rum. The two variables move together and this
can be verified statistically. However, this does not mean that clergymen support the
price of rum or vice versa. The explanation is that the variables are related via a

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third factor, inflation. The variables have increased together as the cost of living has
increased, but they are unlikely to be causally related. This consideration is im-
portant when decisions are based on statistical association. To take the example
further, holding down clergymen’s salaries in order to hold down the price of rum
would work if the relationship were causal, but not if it were mere association.

1.6.6 Technical Errors


Mistakes occur where there is an insufficient understanding of even basic technicali-
ties. An oft-quoted and simplistic case is that of a trade union leader stating his
concern for the lower paid by saying that he would not rest until all his members
earned more than the average salary for the union. (It may be that he was in fact
making a very subtle statement.)
Another simple mistake is in the use of percentages. It would be wrong to sup-
pose that, for example, a 20 per cent increase in productivity this year makes up for
a 20 per cent decrease last year. If the index of productivity two years ago was 100,
then a 20 per cent decrease makes it 80. The 20 per cent increase then makes it 96
(i.e. it has not been returned to its former level).

1.7 How to Spot Statistical Errors


Many types of statistical error can only be dealt with in the context of a particular
quantitative technique, but there are several general questions which can help to
uncover statistical errors and trickery. These questions should be posed whenever
statistical evidence is used.

1.7.1 Who Is Providing the Evidence?


The law provides a good analogy. In a legal case the standing of a witness is an
important consideration in evaluating evidence. One does not expect the defence
counsel to volunteer information damaging to his/her client. In statistics also it is
important to know who is providing the evidence. If the provider stands to gain
from your acceptance of their conclusion, greater care is needed.
It is inconceivable that the makers of Bonzo dog food should ever declare ‘We
have long believed that Bonzo is the finest dog food available. However, recent tests
with a random sample of 2000 dogs indicate that the product made by the Woof
Corporation…’. On the other hand, a report on dog food by an independent
consumer unit carries a greater likelihood of being reliable evidence.

1.7.2 Where Did the Data Come from?


In 2014 ‘on average British people took 2.38 baths per week, compared with 1.15
twenty years ago’ reports a survey of people’s washing habits carried out by a
government department. On the surface this appears to be straightforward evidence,
but how reliable is it?
Where did the data come from? One can assume not from personal observation.
Most probably people were asked. Since not to bath frequently would be a shameful

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admission, answers may well be biased. The figure of 2.38 is likely to be higher than
the true figure. Even so, a comparison with 20 years ago can still be made, but only
provided the bias is the same now as then. It may not be. Where did the 20-year-old
data come from? Most likely from a differently structured survey of different sample
size, with different questions and in a different social environment. The comparison
with 20 years ago, therefore, is also open to suspicion.
One is also misled in this case by the accuracy of the data. The figure of 2.38
suggests a high level of accuracy, completely unwarranted by the method of data
collection. When numbers are presented to many decimal places, one should
question the relevance of the claimed degree of accuracy.

1.7.3 Does It Pass the Common-Sense Test?


Experts in any subject sometimes can become so involved with their work that they
see only the technicalities and not the main issues. Outsiders, inhibited by their lack
of technical expertise, may suppress common-sense questions to the detriment of a
project or piece of research. Anything that does not appear to make sense should be
questioned.
An academic researcher investigated the relationship between total lifetime earn-
ings and age at death, and found that the two variables were closely related. He
concluded that poverty induces early death.
One may question the fact that he is basing a causal conclusion on a statistical
association. Perhaps more importantly, an outsider may think that being alive longer
gives more time to amass earnings and therefore it is at least as valid to conclude
that the causality works in the opposite direction (i.e. an early death causes a person
to have low total lifetime earnings). The researcher was so involved in his work and
also probably had such a strong prior belief that poverty causes early death that he
did not apply the common-sense test.

1.7.4 Has One of the Six Common Errors Been Committed?


Six of the more common types of statistical errors were described in the last section.
Could one of them have been committed? Check through the six categories to see if
one of them could apply:
(a) Is there ambiguity of definition? A statistical term (especially the average)
capable of more than one interpretation may have been used.
(b) Are the pictorial representations misleading? Take a second look to see if
other conclusions could be drawn. Especially check that scales have been includ-
ed.
(c) Is there sample bias? When two samples are compared, is like being compared
with like?
(d) What is missing? Is there any additional information which should have been
included and which could change the conclusion?
(e) Is there a logical error? The numbers may not fully represent the entities they
are intended to measure; a strong associative relationship may not be causal.

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(f) Is there a technical error? Have statistical definitions/techniques/methods


been properly applied? Answering this question will usually require a deeper
theoretical knowledge of the subject.

Learning Summary
The purpose of this introduction has been twofold. The first aim has been to
present some statistical concepts as a basis for more detailed study of the subject.
All the concepts will be further explored. The second aim has been to encourage a
healthy scepticism and atmosphere of constructive criticism, which are necessary
when weighing statistical evidence.
The healthy scepticism can be brought to bear on applications of the concepts
introduced so far as much as elsewhere in statistics. Probability and distributions can
both be subject to misuse.
Logical errors are often made with probability. For example, suppose a ques-
tionnaire about marketing methods is sent to a selection of companies. From the
200 replies, it emerges that 48 of the respondents are not in the area of marketing. It
also emerges that 30 are at junior levels within their companies. What is the proba-
bility that any particular questionnaire was filled in by someone neither in marketing
nor at a senior level? It is tempting to suppose that:
Probability = = 39%

This is almost certainly wrong because of double counting. Some of the 48 non-
marketers are also likely to be at a junior level. If 10 respondents were non-
marketers and at a junior level, then:
Probability = = 34%

Only in the rare case where none of those at a junior level were outside the mar-
keting area would the first calculation have been correct.

2000
No. of civil servants

1500

1000

500

0–8 8–16 16–24 24–40 40–60 60+


Salary (£000s)

Figure 1.13 Civil servants’ salaries

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Graphical errors can frequently be seen with distributions. Figure 1.13 shows an
observed distribution relating to the salaries of civil servants in a government
department. The figures give a wrong impression of the spread of salaries because
the class intervals are not all equal. One could be led to suppose that salaries are
higher than they are. The lower bands are of width £8000 (0–8, 8–16, 16–24). The
higher ones are of a much larger size. The distribution should be drawn with all the
intervals of equal size, as in Figure 1.14.
Statistical concepts are open to misuse and wrong interpretation just as verbal
reports are. The same vigilance should be exercised in the former as in the latter.

2000
No. of civil servants

1500

1000

500

0–8 8–16 16–24 24–32 32–40 40–48 48–56 56–64 64+

Salary (£000s)

Figure 1.14 Civil servants’ salaries (amended)

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Review Questions
1.1 One of the reasons probability is important in statistics is that, if data being dealt with
are in the form of a sample, any conclusions drawn cannot be 100 per cent certain. True
or false?

1.2 A randomly selected card drawn from a pack of cards was an ace. It was not returned
to the pack. What is the probability that a second card drawn will also be an ace?
A. 1/4
B. 1/13
C. 3/52
D. 1/17
E. 1/3

1.3 Which of the following statements are true?


A. The probability of an event is a number between 0 and 1.
B. Since nothing is ever certain, no event can have a probability equal to 1.
C. Classical statisticians take the view that subjective probability has no validity.
D. Bayesian statisticians take the view that only subjective probability has validity.

1.4 A coin is known to be unbiased (i.e. it is just as likely to come down ‘heads’ as ‘tails’). It
has just been tossed eight times and each time the result has been ‘heads’. On the ninth
throw, what is the probability that the result will be ‘tails’?
A. Less than 1/2
B. 1/2
C. More than 1/2
D. 1

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Questions 1.5–1.7 are based on the following information:


A train station’s daily ticket sales (in £000) over the last quarter (= 13 weeks = 78
days) have been collected in histogram form as shown in Figure 1.15.

25
22

17

8
6

Less than 30–39.9 40–49.9 50–59.9 60 or


30 more

Figure 1.15 Train ticket sales

1.5 On how many days were sales not less than £50 000?
A. 17
B. 55
C. 23
D. 48

1.6 What is the probability that on any day sales are £60 000 or more?
A. 1/13
B. 23/78
C. 72/78
D. 0

1.7 What is the sales level that was exceeded on 90 per cent of all days?
A. £20 000
B. £30 000
C. £40 000
D. £50 000
E. £60 000

1.8 Which of the following statements about a normal distribution is true?


A. A normal distribution is another name for a standard distribution.
B. The normal distribution is an example of a standard distribution.
C. The normal distribution is a discrete distribution.
D. The normal distribution may or may not be symmetrical depending upon its
parameters.

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1.9 A normal distribution has mean 60 and standard deviation 10. What percentage of
readings will be in the range 60–70?
A. 68%
B. 50%
C. 95%
D. 34%
E. 84%

1.10 A police checkpoint recorded the speeds of motorists over a one-week period. The
speeds had a normal distribution with a mean 82 km/h and standard deviation 11 km/h.
What speed was exceeded by 97.5 per cent of motorists?
A. 49
B. 60
C. 71
D. 104

Case Study 1.1: Airline Ticketing


As a first step towards planning new facilities at one of its city centre ticket offices, an
airline has collected data on the length of time customers spend at a ticket desk (the
service time). One hundred customers were investigated and the time in minutes each
one was at an enquiry desk was measured. The data are shown below.

0.9 3.5 0.8 1.0 1.3 2.3 1.0 2.4 0.7 1.0
2.3 0.2 1.6 1.7 5.2 1.1 3.9 5.4 8.2 1.5
1.1 2.8 1.6 3.9 3.8 6.1 0.3 1.1 2.4 2.6
4.0 4.3 2.7 0.2 0.3 3.1 2.7 4.1 1.4 1.1
3.4 0.9 2.2 4.2 21.7 3.1 1.0 3.3 3.3 5.5
0.9 4.5 3.5 1.2 0.7 4.6 4.8 2.6 0.5 3.6
6.3 1.6 5.0 2.1 5.8 7.4 1.7 3.8 4.1 6.9
3.5 2.1 0.8 7.8 1.9 3.2 1.3 1.4 3.7 0.6
1.0 7.5 1.2 2.0 2.0 11.0 2.9 6.5 2.0 8.6
1.5 1.2 2.9 2.9 2.0 4.6 6.6 0.7 5.8 2.0

1 Classify the data in intervals one minute wide. Form a frequency histogram. What
service time is likely to be exceeded by only 10 per cent of customers?

Case Study 1.2: JP Carruthers Co.


The JP Carruthers Co. is a medium-sized manufacturing firm. Its sales figures are about
£220 million and its employment level has been around 1100 for the last 10 years. Most
of its sales are in the car industry. JPC’s profit last year was £14 480 000. It has always
enjoyed a reputation for reliability and have generally been regarded as being well
managed.
With few exceptions, JPC’s direct labour force, numbering about 600, is represented
by the TWU, the Transport Workers’ Union. It is the practice in this industry to

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negotiate employee benefits on a company-wide basis, but to negotiate wages for each
class of work in a plant separately. For years, however, this antiquated practice has been
little more than a ritual. Supposedly, the system gives workers the opportunity to
express their views, but the fact is that the wages settlement in the first group invariably
sets the pattern for all other groups within a particular company. The Door Trim Line
at JPC was the key group in last year’s negotiations. Being first in line, the settlement in
Door Trim would set the pattern for JPC that year.
Annie Smith is forewoman for the Door Trim Line. There are many variations of
door trim and Annie’s biggest job is to see that they get produced in the right mix. The
work involved in making the trim is about the same regardless of the particular variety.
That is to say, it is a straight piecework operation and the standard price is 72p per unit
regardless of variety. The work itself, while mainly of an assembly nature, is quite
intricate and requires a degree of skill.
Last year’s negotiations started with the usual complaint from the union about piece
prices in general. There was then, however, an unexpected move. Here is the union’s
demand for the Door Trim Line according to the minutes of the meeting:

We’ll come straight to the point. A price of 72p a unit is diabolical… A fair
price is 80p.
The women average about 71 units/day. Therefore, the 8p more that we want
amounts to an average of £5.68 more per woman per day…
This is the smallest increase we’ve demanded recently and we will not accept
less than 80p.

(It was the long-standing practice in the plant to calculate output on an average daily
basis. Although each person’s output is in fact tallied daily, the bonus is paid on daily
output averaged over the week. The idea is that this gives a person a better chance to
recoup if she happens to have one or two bad days.)
The union’s strategy in this meeting was a surprise. In the past the first demand was
purposely out of line and neither side took it too seriously. This time their demand was
in the same area as the kind of offer that JPC’s management was contemplating.
At their first meeting following the session with the union, JPC’s management heard
the following points made by the accountant:
a. The union’s figure of 71 units per day per person is correct. I checked it against the
latest Production Report. It works out like this:
Average weekly output for the year to date is 7100 units; thus, average daily output
is 7100/5 =1420 units/day.
The number of women directly employed on the line is 20, so that average daily
output is 1420/20 = 71 units/day/woman.
b. The union’s request amounts to an 11.1 per cent increase: (80 − 72)/72 × 100 =
11.1.
c. Direct labour at current rates is estimated at £26 million. Assuming an 11.1 per cent
increase across the board, which, of course, is what we have to anticipate, total
annual direct labour would increase by about £2.9 million: £26 000 000 × 11.1% =
£2 886 000.
Prior to the negotiations management had thought that 7 per cent would be a rea-
sonable offer, being approximately the rate at which productivity and inflation had been
increasing in recent years. Privately they had set 10 per cent as the upper limit to their

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final offer. At this level they felt some scheme should be introduced as an incentive to
better productivity, although they had not thought through the details of any such
scheme.
As a result of the union’s strategy, however, JPC’s negotiating team decided not to
hesitate any longer. Working late, they put together their ‘best’ package using the 10
per cent criterion. The main points of the plan were as follows:
a. Maintain the 72p per unit standard price but provide a bonus of 50p for each unit
above a daily average of 61units/person.
b. Since the average output per day per person is 71, this implies that on average 10
bonus units per person per day would be paid.
c. The projected weekly cost then is £5612:
(71 × 0.72) + (10 × 0.50) = 56.12
56.12 × 5 × 20 = £5612
d. The current weekly cost then is £5112:
71 × 0.72 × 5 × 20 = 5112
e. This amounts to an average increase of £500 per week, slightly under the 10 per
cent upper limit:
500/5112 × 100 = 9.78%
f. The plan offers the additional advantage that the average worker gets 10 bonus units
immediately, making the plan seem attractive.
g. Since the output does not vary much from week to week, and since the greatest
improvement should come from those who are currently below average, the largest
portion of any increase should come from units at the lower cost of 72p each. Those
currently above average probably cannot improve very much. To the extent that this
occurs, of course, there is a tendency to reduce the average cost below the 79p per
unit that would result if no change at all occurs:
5612/(71 × 5 × 20) = 79.0p
At this point management had to decide whether they should play all their cards at
once or whether they should stick to the original plan of a 7 per cent offer. Two further
issues had to be considered:
a. How good were the rates?
b. Could a productivity increase as suggested by the 9.8 per cent offer plan really be
anticipated?
Annie Smith, the forewoman, was called into the meeting, and she gave the following
information:
a. A few workers could improve their own average a little, but the rates were too tight
for any significant movement in the daily outputs.
b. This didn’t mean that everyone worked at the same level, but that individually they
were all close to their own maximum capabilities.
c. A number did average fewer than 61 units per day. Of the few who could show a
sustained improvement, most would be in this fewer-than-61 category.
This settled it. JPC decided to go into the meeting with their ‘best’ offer of 9.8 per
cent. Next day the offer was made. The union asked for time to consider it and the next
meeting was set for the following afternoon.
In the morning of the following day Annie Smith reported that her Production Per-
formance Report (see Table 1.4) was missing. She did not know who had taken it but
was pretty sure it was the union steward.

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Table 1.4 Production performance report


Fiscal Week: 10 Cost Centre: 172 Foreperson: Smith
Employee Pay No. Av. Daily Output this Av. Daily Output Y-T-D
Week
11 98 98
13 88 89
17 72 76
23 44 43
24 52 50
26 79 78
30 77 79
32 52 52
34 96 96
35 86 87
40 67 69
42 64 66
43 95 98
45 86 88
47 50 53
48 42 41
52 43 44
54 45 46
55 94 97
59 68 70
Avg. 71
AV. DAILY THIS WEEK – 1398
AV. DAILY YEAR-TO-DATE – 1420

The next meeting with the union lasted only a few minutes. A union official stated his
understanding of the offer and, after being assured that he had stated the details
correctly, he announced that the union approved the plan and intended to recommend
its acceptance to its membership. He also added that he expected this to serve as the
basis for settlement in the other units as usual and that the whole wage negotiations
could probably be completed in record time.
And that was that. Or was it? Some doubts remained in the minds of JPC’s negotiat-
ing team. Why had the union been so quick to agree? Why had the Production
Performance Report been stolen? While they were still puzzling over these questions,
Annie Smith phoned to say that the Production Performance Report had been returned.

1 In the hope of satisfying their curiosity, the negotiating team asked Annie to bring the
Report down to the office. Had any mistakes been made?

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Was JPC’s offer really 9.8 per cent? If not, what was the true offer?

Case Study 1.3: Newspaper Letters


The two attached letters appeared recently in a newspaper. In the first letter, Dr X
concludes that dentists should not give anaesthetics. In the second, Mr Y concludes that
dentists are the safest anaesthetists there are.
Danger in the Dental Chair
Sir– As a medically qualified anaesthetist responsible for a large number of
dental anaesthetics I read (17 June) with great distress and despair of the death
under an anaesthetic of Miss A.
It is a source of great concern to me that dentists are permitted to give anaes-
thetics. Any fool can give an intravenous injection, but considerable skill and
experience is needed to handle an emergency occurring in anaesthetics.
For anyone, however qualified, however competent, to give an anaesthetic with
no help whatsoever is an act of criminal folly; the BDA, BMA and all the medical
defence societies would agree with this.
I call upon everyone to boycott anaesthetics given by a dentist under any
circumstances.
Yours faithfully,
Dr X, Colchester, Essex.
A Dental Safety Record That Can’t Be Matched
Sir– Dr X’s feelings (Letters, 25 June) about the tragic death of Miss A will be
shared by many, and they do him credit; but they have also led him astray.
Miss A was not anaesthetised; she was heavily sedated with a combination and
dosage of drugs which produced a severe respiratory depression which the
practitioner was unable to reverse.
In calling for a ban upon the giving of general anaesthetics by dentists, Dr X is
on very unsafe ground. The possession of a medical degree does not of itself
confer immunity from stupidity or negligence; many other people would still be
alive if it did.
If Dr X consults the records produced by the Office of Population Censuses and
Surveys, he will find that, overall, more deaths associated with dental anaesthe-
sia occur when the anaesthetist is medically qualified than when he is a dentist.
Excluding the hospital service (where all anaesthetists are medically qualified but
where nearly 50 per cent of deaths occur), medically qualified anaesthetists give
36 per cent of the dental anaesthetics; they have 45 per cent of the associated
deaths. Not only a balance in favour of the dentist anaesthetist, but one which
shows that mischance can occur to anyone, however skilled.
Not even Dr X, I think, would claim that all the deaths which occurred with
medically qualified anaesthetists were due to misadventure, and all those which
occurred with dentists were negligence.
However, these figures should be put in their proper perspective. In general
dental practice and in the Community Dental Service, about 1.5 million anaes-
thetics are given each year. Over the last 15 years, deaths have averaged 4 a

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year. It is a safety record which cannot be matched by any other form of general
anaesthesia.
Yours faithfully,
Mr Y, (President-Elect) Society for the Advancement of Anaesthesia in Dentis-
try.
1 Comment upon the evidence and reasoning (as given in the letters) that lead to these
two conclusions.

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