Statistical Methods for Managerial Decisions

(Term-1: April 27-June 8, 2009)

INSTRUCTOR: PREREQUISITES: 1. 2. 3. Accessibility to a PC, and working knowledge of a word processor. Use of e-mail and blackboard. Knowledge of materials covered in the pre-term statistics course at ISB. Professor Raja Velu

Narrative Course Description: Statistics is the study of how to collect data that can make sense and how to make sense out of the collected data. This course has two parts. It will begin with the basic descriptive statistics and cover sampling and inference. The second part will cover widely-used statistical techniques such as regression, analysis of variance, and time series methods. Students are expected to compute simple problems by hand, analyze large data sets using a statistical software and interpret and effectively communicate the results. Applications from various functional business disciplines will be discussed. Course Objectives: 1. Learn the basic principles of statistical inference and learn regression and its appropriateness for various settings. 2. Learn the computer implementation of these techniques. 3. Interpret, summarize and communicate the results effectively in a business setting.

Computer Software: We will use Minitab for Windows for computations. The Student Guide to Minitab, Release 14+ by J.D. McKenzie and R. Goldman, Addison-Wesley, 2005 may be useful but not required. Texts: Stine and Foster (2009): From data to Decisions (FDD, on Blackboard) Foster, Stine and Waterman (1998): Business Analysis Using Regression, Springer Foster, Stine and Waterman (1998): Basic Business Statistics, Springer

Supplementary Book: Sharpe, De Veaux and Velleman (2010): Business Statistics, Addison-Wesley Examinations/quizzes: Four in-class Quizzes and two tests covering the lecture materials. Session-Wise Lecture Topics: 1. Understanding Variation via descriptive statistics and via Stylized Distributions 2. Inference-1: Hypothesis Tests 3. Inference-2: Confidence Intervals 4. Comparing two or more groups 5. Modeling Dependence 6. Straight line regression and auto regression 7. Inference and diagnostics for regression models 8. Multiple Regression Models 9. Collinearity and variable selection issues 10. Two level categorical variables- analysis of variance via regression

Class 1: Understanding Variation The class will explore descriptive methods for presenting data as well as computing numerical summaries that represent specific features of the data. A key concept that will be presented is the idea of sampling distribution which plays an important role in inference. Specific Topics: -- Boxplots/histograms-skeweness, kurtosis and outliers -- Normal Distribution-Empirical Rule -- Sampling Distribution and Central limit theorem -- Time plots: Random versus Systematic Variation -- Control charts Readings: Review FDD Ch 1-4 and Ch 13

Class 2: Inferential Methods: Hypothesis Tests Inference plays a key role in making business decisions based on limited information. When deciding between two competing alternatives, it is important to know whether there is significant difference among them or if the difference is purely by chance. Hypothesis testing formalizes this notion.

Specific Topics: Hypothesis Testing: Stating null and alternative hypotheses; Type I and Type II of errors; p-value Testing for a proportion/ mean Checking assumptions of the test statistics Statistical significance versus Practical significance ( Type III error)

Readings: FDD, Chapters 14-15

Class 3: Inferential Methods: Confidence Intervals Confidence intervals play complementary role to hypothesis tests; rather than testing for a specific value of a population parameter, confidence intervals provide a range of plausible values for a population characteristic. Specific Topics: Confidence Intervals: desirable properties Intervals for a proportion/ mean Margin of error and sample size calculations Alternative methods for small sample sizes Checking assumptions and robustness of the intervals

Readings: FDD, Chapters 16-17

Class 4: Comparison between Two Groups In many practical applications the business unit must decide between two or more alternate strategies; thus comparing two sets of data is important. It also raises issues related to the designs for data collection, equality of the groups and potential bias with some designs.

Specific Topics: Randomized and controlled Experiments Confounding Effects Matched versus Independent Samples

 Testing for means Testing for proportions : Z and Chi-Square tests Checking assumptions and robustness of the tests Readings: FDD, Chapter 18

Class 5: Modeling Association and Straight Line Regression Modeling relationship among variables is an important theme in statistics. A key descriptive measure for linear association between two variables is covariance; in this class we will study the properties of standardized measure of correlation and its limitations. More formally we will introduce the regression model and its applications in business disciplines such as capital asset model pricing models in finance etc. Further, estimation of the model parameters and interpretation of the estimated coefficients will be discussed.

Specific Topics: Independence, linear dependence Covariance and correlation Principles of least squares Regression modeling: basic steps Key limitations

Readings: FDD, Chapter 5,6,10 and 19

Class 6: Regression Models The Simple regression model can sometimes be used to model non-linear relationship between data through use of appropriate transformations. Some ideas for making the line straight via transformations will be discussed; various forms of autoregressive models as particular cases of the regression model will be presented. The key assumptions in SRM (Simple Regression Model) will be discussed. Specific Topics: Scatter plots, smoothing Transformations Assumptions in Simple Regression Time plots; decomposing the series

 Deterministic/stochastic trend models Readings: FDD, Chapters 20 and 21 BAUR, Ch 1 Class 7: Inference and Diagnostics for Regression Models Once we construct the regression model, the usefulness of the predictor can be formally tested out via hypothesis tests; if the model is useful, we will construct prediction intervals. Important deviations from the idealized regression model can be detected through the analysis of the residuals. We will demonstrate that these residuals can be effectively used to improve upon the model, to identify the outliers, influential observations etc Specific Topics: Inference on the coefficients Prediction intervals Checking on the assumptions via the residuals Various measures of goodness of fit Time plots of residuals: serial dependence; how do we correct for it

Readings: FDD, Chapters 22 BAUR, Ch 1-3

Class 8: Multiple Regression Many real world applications require more than a single predictor variable to describe the variation in the response variable. We study how various non-linear models can be treated in the multiple regression set-up. A key idea that drives the complexity in the model stems from the difference between marginal and partial effect of the predictors. Specific Topics: Introduction and various applications Matrix Plots Marginal versus partial inference Checking on the assumptions via the residuals Various measures of goodness of fit Higher order autoregressive models

Readings: FDD, Chapter 24 BAUR, Ch 4

Class 9: Collinearity and Variable Selection in Multiple Regression Dependence among the predictors can cause estimation and inference problems in the multiple regression set-up. We will study the impact of collinearity and strategies to identify the presence of the problem and how to deal with it. Specific Topics: Collinearity and its impact; variance inflation factors; ridge estimator Marginal versus partial inference: Overall, partial and individual t-tests Variable Selection Methods Autoregressive models: Order selection

Readings: FDD, Chapter 25 BAUR, Ch 4 and 5 Class 10: Multiple Regression with Categorical Predictors When the predictors are categorical, the regression model essentially compares the averages of the response variable for combinations of the levels of the categorical variables. Because most survey data are collected as categorical, this extension of the regression model is found to be quite useful. Specific Topics: Using categorical predictors: Gender Discrimination Studies Comparison among groups: baseline designation Parallel versus interaction model Readings: FDD, Chapter 26 BAUR, Ch 6

Evaluation: Quiz 1 Quiz 2 Exam 1 Quiz 3 Quiz 4 Exam 2 1st week 2nd week 3rd week 4th week 5th week 6th week 5% 5% 35% 5% 5% 45%

Office Hours Will be announced in class. Policy regarding attendance and student-conduct Learning is an interactive process. ISB students are admitted partly based on the experiences they bring to the learning community and what they can add to class discussions. Therefore attendance is an important aspect of studying here. You have to be present in all the classes. Absence is only appropriate in cases of extreme personal illness, injury, or close family bereavement. Voluntary activities such as job interviews, business school competitions, travel plans, joyous family occasions, etc. are never valid reasons for missing any class. Activities such as late arrival either at the beginning of the class or after the break, talking to each other, leaving the cell phones on during class etc. are disruptive to the class and are also unfair to your fellow students. Such activities will be viewed very seriously and a penalty may be imposed for such irresponsible behavior. The mechanism and extent of penalty to be imposed in cases of absence or disruptive behavior is left to the discretion of the faculty.