Chap 3-1 Statistics for Business and Economics, 6e 2007 Pearson Education, Inc.

Chapter 3

Describing Data: Numerical
Statistics for
Business and Economics
6
th
Edition
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-2
After completing this chapter, you should be able to:
Compute and interpret the mean, median, and mode for a
set of data
Find the range, variance, standard deviation, and
coefficient of variation and know what these values mean
Apply the empirical rule to describe the variation of
population values around the mean
Explain the weighted mean and when to use it
Explain how a least squares regression line estimates a
linear relationship between two variables
Chapter Goals
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-3
Chapter Topics
Measures of central tendency, variation, and
shape
Mean, median, mode, geometric mean
Quartiles
Range, interquartile range, variance and standard
deviation, coefficient of variation
Symmetric and skewed distributions
Population summary measures
Mean, variance, and standard deviation
The empirical rule and Bienaym-Chebyshev rule
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-4
Chapter Topics
Five number summary and box-and-whisker
plots
Covariance and coefficient of correlation
Pitfalls in numerical descriptive measures and
ethical considerations
(continued)
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-5
Describing Data Numerically
Arithmetic Mean
Median
Mode
Describing Data Numerically
Variance
Standard Deviation
Coefficient of Variation
Range
Interquartile Range
Central Tendency Variation
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-6
Measures of Central Tendency
Central Tendency
Mean Median Mode
n
x
x
n
1 i
i
=
=
Overview
Midpoint of
ranked values
Most frequently
observed value
Arithmetic
average
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-7
Arithmetic Mean
The arithmetic mean (mean) is the most
common measure of central tendency
For a population of N values:




For a sample of size n:

Sample size
n
x x x
n
x
x
n 2 1
n
1 i
i
+ + +
= =

=

Observed
values
N
x x x
N
x

N 2 1
N
1 i
i
+ + +
= =

=

Population size
Population
values
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-8
Arithmetic Mean
The most common measure of central tendency
Mean = sum of values divided by the number of values
Affected by extreme values (outliers)

(continued)
0 1 2 3 4 5 6 7 8 9 10
Mean = 3
0 1 2 3 4 5 6 7 8 9 10
Mean = 4
3
5
15
5
5 4 3 2 1
= =
+ + + +
4
5
20
5
10 4 3 2 1
= =
+ + + +
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-9
Median
In an ordered list, the median is the middle
number (50% above, 50% below)





Not affected by extreme values
0 1 2 3 4 5 6 7 8 9 10
Median = 3
0 1 2 3 4 5 6 7 8 9 10
Median = 3
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-10
Finding the Median
The location of the median:



If the number of values is odd, the median is the middle number
If the number of values is even, the median is the average of
the two middle numbers

Note that is not the value of the median, only the
position of the median in the ranked data

data ordered the in position
2
1 n
position Median
+
=
2
1 n+
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-11
Mode
A measure of central tendency
Value that occurs most often
Not affected by extreme values
Used for either numerical or categorical data
There may may be no mode
There may be several modes

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Mode = 9
0 1 2 3 4 5 6
No Mode
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-12
Five houses on a hill by the beach
Review Example
$2,000 K
$500 K
$300 K
$100 K
$100 K
House Prices:

$2,000,000
500,000
300,000
100,000
100,000

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-13
Review Example:
Summary Statistics
Mean: ($3,000,000/5)
= $600,000

Median: middle value of ranked data
= $300,000

Mode: most frequent value
= $100,000
House Prices:

$2,000,000
500,000
300,000
100,000
100,000
Sum 3,000,000
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-14
Mean is generally used, unless
extreme values (outliers) exist
Then median is often used, since
the median is not sensitive to
extreme values.
Example: Median home prices may be
reported for a region less sensitive to
outliers
Which measure of location
is the best?
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-15
Shape of a Distribution
Describes how data are distributed
Measures of shape
Symmetric or skewed
Mean = Median

Mean < Median Median < Mean
Right-Skewed Left-Skewed Symmetric
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-16
Same center,
different variation
Measures of Variability
Variation
Variance Standard
Deviation
Coefficient
of Variation
Range Interquartile
Range
Measures of variation give
information on the spread
or variability of the data
values.

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-17
Range
Simplest measure of variation
Difference between the largest and the smallest
observations:


Range = X
largest
X
smallest

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Range = 14 - 1 = 13
Example:
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-18
Ignores the way in which data are distributed



Sensitive to outliers


7 8 9 10 11 12
Range = 12 - 7 = 5
7 8 9 10 11 12
Range = 12 - 7 = 5
Disadvantages of the Range
1,1,1,1,1,1,1,1,1,1,1,2,2,2,2,2,2,2,2,3,3,3,3,4,5
1,1,1,1,1,1,1,1,1,1,1,2,2,2,2,2,2,2,2,3,3,3,3,4,120
Range = 5 - 1 = 4
Range = 120 - 1 = 119
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-19
Interquartile Range
Can eliminate some outlier problems by using
the interquartile range

Eliminate high- and low-valued observations
and calculate the range of the middle 50% of
the data

Interquartile range = 3
rd
quartile 1
st
quartile
IQR = Q
3
Q
1

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-20
Interquartile Range
Median
(Q2)
X
maximum
X
minimum
Q1 Q3
Example:
25% 25% 25% 25%
12 30 45 57 70
Interquartile range
= 57 30 = 27
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-21
Quartiles
Quartiles split the ranked data into 4 segments with
an equal number of values per segment
25% 25% 25% 25%
The first quartile, Q
1
, is the value for which 25% of the
observations are smaller and 75% are larger
Q
2
is the same as the median (50% are smaller, 50% are
larger)
Only 25% of the observations are greater than the third
quartile

Q1 Q2 Q3
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-22
Quartile Formulas
Find a quartile by determining the value in the
appropriate position in the ranked data, where

First quartile position: Q
1
= 0.25(n+1)

Second quartile position: Q
2
= 0.50(n+1)
(the median position)

Third quartile position: Q
3
= 0.75(n+1)


where n is the number of observed values
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-23
(n = 9)
Q
1
= is in the 0.25(9+1) = 2.5 position of the ranked data
so use the value half way between the 2
nd
and 3
rd
values,
so Q
1
= 12.5
Quartiles
Sample Ranked Data: 11 12 13 16 16 17 18 21 22
Example: Find the first quartile
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-24
Average of squared deviations of values from
the mean

Population variance:
Population Variance
1 - N
) (x

N
1 i
2
i
2

=

=
Where
= population mean
N = population size
x
i
= i
th
value of the variable x

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-25
Average (approximately) of squared deviations
of values from the mean

Sample variance:
Sample Variance
1 - n
) x (x
s
n
1 i
2
i
2

=

=
Where
= arithmetic mean
n = sample size
X
i
= i
th
value of the variable X
X
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-26
Population Standard Deviation
Most commonly used measure of variation
Shows variation about the mean
Has the same units as the original data


Population standard deviation:
1 - N
) (x

N
1 i
2
i
=

=
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-27
Sample Standard Deviation
Most commonly used measure of variation
Shows variation about the mean
Has the same units as the original data


Sample standard deviation:
1 - n
) x (x
S
n
1 i
2
i
=

=
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-28
Calculation Example:
Sample Standard Deviation
Sample
Data (x
i
) : 10 12 14 15 17 18 18 24
n = 8 Mean = x = 16
4.2426
7
126
1 8
16) (24 16) (14 16) (12 16) (10
1 n
) x (24 ) x (14 ) x (12 ) X (10
s
2 2 2 2
2 2 2 2
= =

+ + + +
=

+ + + +
=

A measure of the average

scatter around the mean
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-29
Measuring variation
Small standard deviation

Large standard deviation
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-30
Comparing Standard Deviations
Mean = 15.5
s = 3.338
11 12 13 14 15 16 17 18 19 20 21
11 12 13 14 15 16 17 18 19 20 21
Data B
Data A
Mean = 15.5
s = 0.926
11 12 13 14 15 16 17 18 19 20 21
Mean = 15.5
s = 4.570
Data C
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-31
Advantages of Variance and
Standard Deviation
Each value in the data set is used in the
calculation

Values far from the mean are given extra
weight
(because deviations from the mean are squared)
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-32
For any population with mean and
standard deviation , and k > 1 , the
percentage of observations that fall within
the interval
[ + k]
Is at least


Chebyshevs Theorem
)]% (1/k 100[1
2

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-33
Regardless of how the data are distributed,
at least (1 - 1/k
2
) of the values will fall
within k standard deviations of the mean
(for k > 1)
Examples:

(1 - 1/1
2
) = 0% ..... k=1 ( 1)
(1 - 1/2
2
) = 75% ........ k=2 ( 2)
(1 - 1/3
2
) = 89% . k=3 ( 3)
Chebyshevs Theorem
within At least
(continued)
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-34
If the data distribution is bell-shaped, then
the interval:
contains about 68% of the values in
the population or the sample
The Empirical Rule
1

68%
1
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-35
contains about 95% of the values in
the population or the sample
contains about 99.7% of the values
in the population or the sample
The Empirical Rule
2
3
3
99.7% 95%
2
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-36
Coefficient of Variation
Measures relative variation
Always in percentage (%)
Shows variation relative to mean
Can be used to compare two or more sets of
data measured in different units
100%
x
s
CV
|
|
.
|

\
|
=
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-37
Comparing Coefficient
of Variation
Stock A:
Average price last year = $50
Standard deviation = $5


Stock B:
Average price last year = $100
Standard deviation = $5
Both stocks
have the same
standard
deviation, but
stock B is less
variable relative
to its price
10% 100%
$50
$5
100%
x
s
CV
A
= =
|
|
.
|

\
|
=
5% 100%
$100
$5
100%
x
s
CV
B
= =
|
|
.
|

\
|
=
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-38
Using Microsoft Excel
Descriptive Statistics can be obtained
from Microsoft

Excel
Use menu choice:
tools / data analysis / descriptive statistics

Enter details in dialog box
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-39
Using Excel
Use menu choice:
tools / data analysis /
descriptive statistics

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-40
Enter dialog box
details


Check box for
summary statistics

Click OK
Using Excel
(continued)
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-41
Excel output
Microsoft Excel
descriptive statistics output,
using the house price data:
House Prices:

$2,000,000
500,000
300,000
100,000
100,000

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-42
Weighted Mean
The weighted mean of a set of data is





Where w
i
is the weight of the i
th
observation

Use when data is already grouped into n classes, with
w
i
values in the i
th
class
i
n n 2 2 1 1
n
1 i
i i
w
x w x w x w
w
x w
x

+ + +
= =
=

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-43
Approximations for Grouped Data
Suppose a data set contains values m
1
, m
2
, . . ., m
k
,
occurring with frequencies f
1
, f
2
, . . . f
K


For a population of N observations the mean is




For a sample of n observations, the mean is

N
m f

K
1 i
i i
=
=
n
m f
x
K
1 i
i i
=
=

=
=
K
1 i
i
f N where

=
=
K
1 i
i
f n where
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-44
Approximations for Grouped Data
Suppose a data set contains values m
1
, m
2
, . . ., m
k
,
occurring with frequencies f
1
, f
2
, . . . f
K


For a population of N observations the variance is




For a sample of n observations, the variance is

N
) (m f

K
1 i
2
i i
2

=

=
1 n
) x (m f
s
K
1 i
2
i i
2

=

=
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-45
The Sample Covariance
The covariance measures the strength of the linear relationship
between two variables

The population covariance:





The sample covariance:








Only concerned with the strength of the relationship
No causal effect is implied
N
) )(y (x
y) , (x Cov
N
1 i
y i x i
xy

=

= =

o
1 n
) y )(y x (x
s y) , (x Cov
n
1 i
i i
xy

= =

=
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-46
Covariance between two variables:

Cov(x,y) > 0 x and y tend to move in the same direction
Cov(x,y) < 0 x and y tend to move in opposite directions
Cov(x,y) = 0 x and y are independent

Interpreting Covariance
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-47
Coefficient of Correlation
Measures the relative strength of the linear relationship
between two variables

Population correlation coefficient:




Sample correlation coefficient:




Y X
s s
y) , (x Cov
r =
Y X

y) , (x Cov
=
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-48
Features of
Correlation Coefficient, r
Unit free
Ranges between 1 and 1
The closer to 1, the stronger the negative linear
relationship
The closer to 1, the stronger the positive linear
relationship
The closer to 0, the weaker any positive linear
relationship
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-49
Scatter Plots of Data with Various
Correlation Coefficients
Y
X
Y
X
Y
X
Y
X
Y
X
r = -1 r = -.6 r = 0
r = +.3 r = +1
Y
X
r = 0
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-50
Using Excel to Find
the Correlation Coefficient
Select
Tools/Data Analysis
Choose Correlation from
the selection menu
Click OK . . .
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-51
Using Excel to Find
the Correlation Coefficient
Input data range and select
appropriate options
Click OK to get output
(continued)
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-52
Interpreting the Result
r = .733

There is a relatively
strong positive linear
relationship between
test score #1
and test score #2

Students who scored high on the first test tended
to score high on second test
Scatter Plot of Test Scores
70
75
80
85
90
95
100
70 75 80 85 90 95 100
Test #1 Score
T
e
s
t

#
2

S
c
o
r
e
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-53
Obtaining Linear Relationships
An equation can be fit to show the best linear
relationship between two variables:

Y =
0
+
1
X

Where Y is the dependent variable and X is the
independent variable
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-54
Least Squares Regression
Estimates for coefficients
0
and
1
are found to
minimize the sum of the squared residuals

The least-squares regression line, based on sample
data, is


Where b
1
is the slope of the line and b
0
is the y-
intercept:
x b b y
1 0

+ =
x
y
2
x
1
s
s
r
s
y) Cov(x,
b = =
x b y b
1 0
=
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 3-55
Chapter Summary
Described measures of central tendency
Mean, median, mode
Illustrated the shape of the distribution
Symmetric, skewed
Described measures of variation
Range, interquartile range, variance and standard deviation,
coefficient of variation
Discussed measures of grouped data
Calculated measures of relationships between
variables
covariance and correlation coefficient