Chapter 6:

Sampling and Estimation

Business Analytics, 1st edition

James R. Evans

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Chapter 6 Topics
 Statistical Sampling
 Estimating Population Parameters
 Sampling Error
 Sampling Distributions
 Interval Estimates
 Confidence Intervals
 Using Confidence Intervals for Decision Making
 Prediction Intervals
 Confidence Intervals and Sample Size

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Statistical Sampling
 Sampling is the foundation of statistical analysis.
 Sampling plan - a description of the approach that

is used to obtain samples from a population

 A sampling plan states:

- its objectives
- target population
- population frame
- operational procedures for data collection
- statistical tools for data analysis

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Statistical Sampling

Example 6.1 A Sampling Plan for a Market

Research Study
 A company wants to understand how golfers might

respond to a membership program that provides

discounts at golf courses.
 Specify 5 components for a sampling plan.

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Statistical Sampling
Example 6.1 (continued)
A Sampling Plan for a Market Research Study
 Objective - estimate the proportion of golfers who
would join the program
 Target population - golfers over 25 years old
 Population frame - golfers who purchased
equipment at particular stores
 Operational procedures - e-mail link to survey or
direct-mail questionnaire
 Statistical tools - PivotTables to summarize data
by demographic groups and estimate likelihood of
joining the program
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Statistical Sampling
Sampling Methods
 Subjective Methods
- judgment sampling
- convenience sampling
 Probability Sampling

- simple random sampling

involves selecting items from a population so that
every subset of a given size has an equal
chance of being selected

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Statistical Sampling

Example 6.2 Simple Random Sampling with Excel

 Sample from the

Excel database
Sales Transactions
Data
Data Analysis
Sampling
Figure 6.1
 Periodic selects every nth number
 Random selects a simple random sample

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Statistical Sampling

Example 6.2 (continued)

Simple Random Sampling with Excel
 Samples generated by Excel
 Sorted by customer ID
 Sampling is done with replacement

so duplicates may occur.

Figure 6.2

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Statistical Sampling
Additional Probability Sampling Methods
- Systematic (periodic) sampling
- Stratified sampling
- Cluster sampling
- Sampling from a continuous process

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Statistical Sampling

Analytics in Practice: Using Sampling

Techniques to Improve Distribution
 MillerCoors brewery wanted to better understand

distributor performance
 Defined 7 attributes of proper distribution
 Collected data from distributors using stratified

sampling based on market share

 Developed performance rankings of distributors

and identified opportunities for improvement

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Estimating Population Parameters
  

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Estimating Population Parameters
 Unbiased Estimators - the expected value of the
estimator equals the population parameter
 Using n − 1 in the denominator of the sample

variance s2 results in an unbiased estimator of σ2.

is an unbiased
estimator of

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Sampling Error

 Sampling (statistical) error occurs because

samples are only a subset of the total population
 Sampling error depends on the size of the sample

relative to the population.

 Nonsampling error occurs when the sample does

not adequately represent the target population.
 Nonsampling error usually results from a poor

sample design or choosing the wrong population

frame.

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Sampling Error

Example 6.3 A Sampling Experiment

 A population is uniformly distributed between 0

and 10.
 Mean = (0 + 10)/2 = 5
 Variance = (10 − 0)2/12 = 8.333
 Use Excel to generate 25 samples of size 10 from

this population. Compute the mean of each.

 Prepare a histogram of the 25 sample means.
 Prepare a histogram of the 250 observations.

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Sampling Error

Example 6.3 (continued) A Sampling Experiment

Figure 6.3
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Sampling Error

Example 6.3 (continued) A Sampling Experiment

 Repeat the sampling experiment for samples of

size 25, 100, and 500

Table 6.1

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Sampling Error
Example 6.3 (continued) A Sampling Experiment

Figure 6.4
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Sampling Error

Example 6.4 Estimating Sampling Error Using the

Empirical Rules
 Using the empirical rule for 3 standard deviations

away from the mean, ~99.7% of sample means

should be between:
[2.55, 7.45] for n = 10
[3.65, 6.35] for n = 25
[4.09, 5.91] for n = 100 Table 6.1

[4.76, 5.24] for n = 500

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Sampling Distributions
  

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Sampling Distributions

Example 6.5
Computing the Standard Error of the Mean
 For the uniformly distributed population, we found

2 = 8.333 and, therefore,  = 2.89

 Compute the standard error of the mean for

sample sizes of 10, 25, 100, 500.

For comparison from Table 6.1

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Sampling Distributions
Central Limit Theorem
 If the sample size is large enough, then the

sampling distribution of the mean is:

- approximately normally distributed regardless
of the distribution of the population
- has a mean equal to the population mean
 If the population is normally distributed, then the

sampling distribution is also normally distributed

for any sample size.
 This theorem is one of the most important

practical results in statistics.

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Sampling Distributions

Example 6.6
Using the Standard Error in Probability Calculations
 The purchase order amounts for books on a

publisher’s Web site is normally distributed with a

mean of $36 and a standard deviation of $8.
 Find the probability that:

a) someone’s purchase amount exceeds $40

b) the mean purchase amount for 16 customers
exceeds $40

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Sampling Distributions
Example 6.6 (continued)
Using the Standard Error in Probability Calculations
a) P(x > 40) = 1− NORM.DIST(40, 36, 8, true)
= 0.3085
b) P(x− > 40) = 1− NORM.DIST(40, 36, 2, true)
= 0.0228

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Interval Estimates

Example 6.7 Interval Estimates in the News

 A Gallup poll might report that 56% of voters

support a certain candidate with a margin of error

of ± 3%.
 We would have a lot of confidence that the

candidate would win.

 If, instead, the poll reported a 52% level of support

with a ± 4% margin of error, we would be less
confident in predicting a win for the candidate.

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Confidence Intervals

Interval Estimates
 Provide a range for a population characteristic

based on a sample.
 A confidence interval of 100(1 − α)% is an

interval [A, B] such that the probability of falling

between A and B is 1− α.
 1− α is called the level of confidence.
 90%, 95%, and 99% are common values for 1−

α.
 Confidence intervals provide a way of assessing

the accuracy of a point estimate.

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Confidence Intervals

Confidence Interval For the Mean with

Known Population Standard Deviation
 Sample mean ± margin of error

 Sample mean ± z (standard error)

α/2

where zα/2 is the value of the standard normal

random variable for an upper tail area of α/2
(or a lower tail area of 1 − α/2).

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Confidence Intervals

Example 6.8 Computing a Confidence Interval with

a Known Standard Deviation
 A production process fills bottles of liquid

detergent.
 The standard deviation in filling volumes is

constant at 15 mls.
 A sample of 25 bottles revealed a mean filling

volume of 796 mls.

 Give a 95% confidence interval estimate of the

mean filling volume for the population.

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Confidence Intervals
Example 6.8 (continued) Computing a Confidence
Interval with a Known Standard Deviation

= Mean ± CONFIDENCE.NORM(alpha, stdev, size)

= 796 ± CONFIDENCE.NORM(.05, 15, 25)

Figure 6.5

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Confidence Intervals
The t-Distribution
 Used for confidence intervals when the population

standard deviation in unknown.

 Its only parameter is the degrees of freedom (df).

Figure 6.6

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Confidence Intervals
Confidence Interval for a Population Mean with an
Unknown Standard Deviation
 Sample mean ± margin of error
 Sample mean ± t (estimated standard error)
α/2

where tα/2 is the value of the t-distribution with

df = n − 1 for an upper tail area of α/2.
 t values are found in Table 2 of Appendix B.

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Confidence Intervals
Example 6.9 Computing a Confidence Interval with
an Unknown Standard Deviation
 A large bank has sample data used in making

credit decisions.
 Give a 95% confidence interval estimate of the

mean revolving balance of homeowner applicants.

Figure 6.7

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Confidence Intervals

Example 6.9 (continued) Computing a Confidence

Interval with an Unknown Standard Deviation

= Mean ± T.INV(confidence level, df)*s/SQRT(n)

= Mean ± CONFIDENCE.T(alpha, stdev, size)

Figure 6.8

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Confidence Intervals
  

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Confidence Intervals
Example 6.10 Computing a Confidence Interval for
a Proportion (of those willing to pay a lower health
insurance premium for a lower deductible)

Figure 6.9

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Confidence Intervals
Example 6.10 (continued) Computing a 95%
Confidence Interval for a Proportion

Sample proportion ± NORM.S.INV((alpha/2)*

(standard error of the sample proportion))

Figure 6.10

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Using Confidence Intervals
for Decision Making
Example 6.11 Drawing a Conclusion about a
Population Mean Using a Confidence Interval
 In Example 6.8 we obtained a confidence interval

for the bottle-filling process as [790.12, 801.88]

 The required volume is 800 and the sample mean

is 796 mls.
 Should machine

adjustments be
made?

Figure 6.5

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Using Confidence Intervals
for Decision Making
  

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Prediction Intervals

Computing a Prediction Interval

 Confidence intervals estimate the value of a

parameter such as a MEAN or PROPORTION.

 Prediction intervals provide a range of values for a

new OBSERVATION from the same population.

 Prediction intervals are wider than confidence

intervals.
 Confidence interval:

 Prediction interval:
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Confidence Intervals and Sample Size

Example 6.13 Computing a Prediction Interval

Compute a 95% prediction interval for the revolving
balances of customers (Credit Approval Decisions)

 
 
    From Example 6.9

Prediction interval width = 22,585 Confidence interval width = 4,267

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Confidence Intervals and Sample Size
  

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Confidence Intervals and Sample Size
Example 6.14
Sample Size Determination for the Mean
 In the liquid detergent example, the margin of

error was 2.985 mls.

 What is sample size is needed to reduce the

margin of error to at most 3 mls?

Round up to
97 samples.
Figure 6.11

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Confidence Intervals and Sample Size
  

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Chapter 6 - Key Terms
 Central limit theorem  Point Estimate
 Cluster sampling  Population frame
 Confidence interval  Prediction interval
 Convenience sampling  Probability interval
 Degrees of freedom  Sample proportion
 Estimation  Sampling (statistical)
 Estimators error
 Interval estimate  Sampling distribution

 Judgment sampling of the mean

 Level of confidence  Sampling plan

 Nonsampling error

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Chapter 6 - Key Terms (continued)
 Simple random sampling
 Standard error of the mean
 Stratified sampling
 Systematic (or periodic) sampling
 t-distribution

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Case Study
Performance Lawn Equipment (6)
 Recall that PLE produces lawnmowers and a
medium size diesel power lawn tractor.
 Determine the probability a customer is highly
satisfied for each geographic region.
 Compute a confidence interval estimate of
customer service response times.
 Find the required sample size for a confidence
interval estimate of blade weights.
 Write a formal report summarizing your results.

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