RESEARCH METHODOLOGY
LESSON 18:
STATISTICAL INFERENCES & SAMPLING DISTRIBUTION
In the last lesson we focused on understanding the theoretical
foundations of statistical inference and sampling distributions.
In this lesson we will look at the concept of confidence interval
estimation in more detail and attempt to understand it intuitively
as well as its applications to management situations. We had also
examined the concept of confidence intervals. Managers are always
making estimates. The confidence limits help define the limits of
these estimates. The concept applies as we shall see even when we
make a non statistical estimate We shall continue with this concept
in this lecture and attempt to understand intuitively what we
mean by a confidence interval. We shall also spend some time
practicing applications of the principles we have learnt in this
lesson to practical situations.
By the end of this chapter you should be able to :
• Apply concepts of Interval estimates, Confidence intervals
and confidence levels to business situations
• Learn to interpret a confidence interval
• Determine factors influencing choice of technique
• Examine issues relating to the determination of level of
significance
Standard Error
Students, there some important concepts which one needs to
understand issues as confidence intervals. One of these concepts
is standard error.
The standard deviation of sampling distribution is known as
standard error (S. E.). This is equal to population standard
deviation divided by square root of sample size.
SE of mean=
Confidence Intervals
In the earlier sections we saw that the same proportion of area
under the normal curve lies within plus/minus any given number
of standard deviations and these can be related to specific
probabilities. We can use this property to make a statement about
the probability that that a particular interval – defined in terms of
number of standard deviations from the mean – contains the
population mean.
A confidence interval around a sample mean would be defined as:
Thus we can see that the concept of confidence interval therefore
provides an interval estimate around >x which would essentially
represent the extent of sampling error.
Examples of application of confidence interval estimation
1. From a population with variance of 185, a sample of 64
individuals has an estimate of mean =217.
i. Find the SE of mean.
ii. Establish an interval estimate that should include the
population mean 68.3% of the time.
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Activities
1. From a population known to have a standard deviation of
1.4, a sample of 60 is taken. The mean is found to be 6.2.
i. Find the SE of the mean.
ii. Establish an interval estimate around the mean, using
one standard error of the mean.
Ans : i. 181 ii. (6.019, 6.381)
2. University of Delhi is conducting a study on the average
weight of the bricks that make up the university’s paths.
Workers were sent to dig up and weigh a sample of 421
bricks . The average sample mean weight was 14.2 kg. It is
well known fact that standard deviation of brick weight was
.8kgs.
i. Find the SE of the mean
ii. What is the interval around the sample mean that will
include the population mean 95.5% of the time?
Ans: i. .0390kgs ii. (14.122kgs, 14.278kgs)
Understanding confidence levels and confidence intervals
What is a Confidence Level?
In statistics the probability associated with an interval estimate is
called the confidence level. This probability indicates how confident
we are that the interval estimate will include the population
parameter. A higher probability means more confidence. The most
commonly used confidence levels are: 90%, 95%, 99%. These are
not the only confidence levels, we can for example have a 95.5% or
80% confidence level.
What is a Confidence Interval?
This is the range of the estimate we are making. For example we
can say that the mean income of the population will lie between
Rs 8000-Rs24000/. Confidence intervals can also be expressed in
terms of standard errors than in numerical values:
Mean+1.64SE = upper limit of 90% confidence interval
Mean-1.64SE = lower limit of 90% confidence interval
What is the relationship between confidence level and confidence
interval?
Somehow we have a perception that a high confidence levels such
as 99% means a high degree of accuracy. In fact it can mean the very
opposite as it will produce a larger confidence interval. Larger
confidence intervals mean that estimates are not so precise and
there is an element of fuzziness about them.
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These concepts are not just used in statistics but have relevance to
our day-to-day life where we frequently set up confidence intervals
and try to establish the associated confidence level with that interval
level. An example can best illustrate the relation between the two.
A customer is interested in getting his washing machine repaired.
He discusses the possible time frame for getting his repair done
with the maintenance manager of the service center.
The table below shows that as the customer sets tighter and tighter
confidence intervals, the service center manager hedges by agreeing
to a lower and lower level of confidence.
Will my machine be repaired ..
Customer’s demand Manager’s hedge
.. within a year I am absolutely certain (99%)
..within a month I am almost positive (95%)
..within a month I am pretty sure of it(80%)
.. by tomorrow I am not certain that I can manage it (40%)
..immediately There is little chance that of that (1%)
As we can see as the customer sets tighter and tighter confidence
intervals the manager sets progressively lower confidence levels.
Finally the when the confidence interval is very narrow (will I get it
immediately?) the estimate is associated with a very low level of
confidence as to be useless (1%).
Ultimately there are no free lunches when it comes to dealing with
confidence intervals and levels. The manager has to weigh the
benefit of high confidence levels or certainty associated with a
decision with the cost of having to accept a lower level of accuracy.
Interpreting a Confidence Interval
How do we interpret a confidence interval?
The process of sampling is such that we use one sample to
estimate a population parameter. When we set up a confidence
interval around a sample mean along with an associated confidence
level , what exactly do we mean?
This concept can be illustrated more clearly with the help of an
example:
A company estimates, on the basis of a sample of 100, that the
life of car batteries it manufactures is 36 months. In probability
terms we can make the following statements:
We can say that we are…
• 68.3% confident that the true life in the interval 35.293 to
36.707 months(36±1) standard error
• 95.5% confident that the true life in the interval 34.586 to
37.414 months(36±2 standard error)
• 99.7% confident that the true life in the interval 33.879 to
38.121 months(36±3 standard error)
For example we say that we are 95.5% confident that the mean life
of a battery lies within 34.586 and 37.414 months.
This does not mean that there is a 95.5% probability that the
mean life of all batteries falls within the interval established.
Instead it means that if we select many random samples of the
same size and calculate a confidence interval around the mean of
each of these samples , then in about 95% of these cases the
population mean will lie within that interval.
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Similarly the following two statements express a confidence
RESEARCH METHODOLOGY
interval:
• 95.5% of all sample means are within ± 2 standard
deviations of the population mean Or equivalently
• There is a 95.5% probability that lies within ± 2 standard
errors of all sample means.
What do these Statements Mean?
What we mean is if we select 1000 samples at random from a
given population and then construct a ±2 standard deviations
interval around the mean of each of these samples, we will find
that approx 95% of these intervals will include the population
mean. Similarly the probability is 68.3% that the mean of the
sample will be within ± of 1 standard deviation.
The fig1 below illustrates this graphically. We show the ±2 standard
error interval for five different samples. The sample intervals for
each sample mean is also shown. are shown in figure 7. As we can
see only the interval around >x 4 does not contain the population
mean.
Figure1
In other words we expect that in 95.5% of samples the population
mean would be located in an interval ±2 standard error from the
sample mean. Ultimately the confidence level for an estimate is
based on the expected results if the sampling process is repeated
many times.
Solving Problems based on Confidence Interval
Estimation
It is easy to solve problems on confidence intervals if we
understand that a confidence level is defined by how many SE
from there are on either side of the mean. This is indicated by the
shaded region in a diagram of the normal distribution( see fig 1).
The normal tables given in the appendix co nvert any desired level
of confidence into standard errors from the mean of a standard
normal distribution. Since we have information regarding one
standard error we can calculate the end points or limits by SE
multiplied by the appropriate z statistic. These represent the limits
of our confidence interval. If the population standard deviation
is not known we can use sample standard deviation (s)to estimate
the population standard deviation.
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 Examples
RESEARCH METHODOLOGY
1. Given the following confidence intervals , express the lower
and upper limits in terms of sample mean, and SE.
• 54% : ¯x ± .74SE
• 75% : ¯x ± 1.15SE
• 95%:
• 98%:
1. For a population with known variance of 185 , a sample of 64
individuals leads to 217 as an estimate of the mean.
i. Find the SE of mean
ii. Establish an interval estimate that should include the
population mean 68.3% of the time.
3. Ena is a frugal under graduate at a University. She is
interested in purchasing a used stereos . She randomly
selects 125 newspaper ads and found the average price of a
used stereos in the sample was Rs3250. She knows the
standard deviation of used stereos is Rs.615.
i. Establish an interval estimate of stereo prices so that
Ena can be 68.3% certain that the population mean
price lies within this interval.
ii. Establish an interval estimate of stereos so that Ena
can be 95.5% certain that the population mean lies
within this interval.
Again we first write our data:
3. Steve Kipper has a reputed barbers shop . As each customer
enters Steve yells out the number of minutes that the
customer can expect to wait before getting his cut. The only
statistician in town is frustrated with what he feels are highly
inaccurate point estimates of Steve’s. He determines that the
actual waiting time for any customer is normally distributed
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106
with mean equal to Steve’s estimate in minutes and standard
deviation equal to 5 minutes divided by the customers
position in the waiting line. Help Steve’s customers develop
95 percent probability intervals for the following situations:
We need to help Steve’s customers determine s
a. The customer is second in line and Steve’s estimate is 25
minutes.
b. The customer is third in line and Steve’s estimate is 15 minutes.
c. The customer is fifth in line and Steve’s estimate is 38 minutes.
d. The customer is first in line and Steve’s estimate is 20 minutes.
e. How are these intervals different from confidence intervals?
To solve this problem we need to reduce the problem in terms
of sampling concepts.
Sample mean = Steve’s estimate of waiting time
Standard error of the estimate = 5minutes/customers position
in the queue
a. To set up a 95% confidence interval for the first customer:
Sample mean = 25, Standard deviation= 5/2=2.5
Confidence interval= 25+/-1.96*2.5= 25+/-4.9mins
b. 15+/- 3.267 mins
c. 38+/-1.96mins
d. 20+/-9.8mins
e. These are prediction intervals for the next observations
rather than confidence intervals for the population mean
based on a sample that ahs already been take,
Exercises
1. Define confidence level for an interval estimate.
2. Suppose you wish to use a confidence level of 80%. Define
upper and lower limits in terms of the sample mean and SE.
3. In what way may an estimate be less meaningful because of
a. High confidence level ?
b. Narrow confidence interval?
4. Suppose a sample of 50 is taken from a population with
standard deviation
a. Establish an interval estimate for the population mean
that is 95.5 percent certain to include the true population
mean.
b. Suppose, instead, that the sample size was 5,000.
Establish an interval for the population mean that is
95.5 percent certain to include the true population mean.
c. Why might estimate (a) be preferred to estimate (b)? Why
might (b) preferred to (a) ?
5. Given the following confidence levels, express the lower and
upper limits of the confidence interval for these levels in
terms of ¯x and SE.
a. 60 percent.
b. 70 percent
c. 92 percent.
d. 96 percent.
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6. Jon Jackobsen, an overzealous graduate student, has just

RESEARCH METHODOLOGY
completed a first draft of his 700-page dissertation. Jon has
typed his paper himself and is interested in knowing the
average number of typographical errors per page, but does
not want to read the whole paper. Knowing a little bit about
business statistics, Jon selected 40 pages at random to read
and found that the average number of typos per page was
4.3 and the sample standard deviation was 1.2 typos per
page.
a. Calculate the estimated standard error of the mean.
b. Construct for Jon a 90 percent confidence interval for
the true average number of typos per page in his paper
References
Aaker D A , Kumar V & Day G S - Marketing Research (John
Wiley &Sons Inc, 6th ed.)
Diamantopoulos A and Schlegelmilch A- Taking the fear out of
Data Analysis (Dryden Press, 1997)
Communication Service
Kothari C R – Quantitative Techniques (Vikas Publishing House
3rd ed.)
Levin R I & Rubin DS - Statistics for Management (Prentice Hall
of India, 2002)
Notes

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