Advanced statistics:

distribution theory
J. Penzer
ST3133, 2790133

2011
Undergraduate study in
Economics, Management,
Finance and the Social Sciences
This subject guide is for a 300 course offered as part of the University of London
International Programmes in Economics, Management, Finance and the Social Sciences.
This is equivalent to Level 6 within the Framework for Higher Education Qualifications in
England, Wales and Northern Ireland (FHEQ).
For more information about the University of London International Programmes
undergraduate study in Economics, Management, Finance and the Social Sciences, see:
www.londoninternational.ac.uk

Chapter 1: Introduction

Chapter 1
Introduction
133 Advanced statistics: distribution theory is a 300 course
offered on the Economics, Management, Finance and the Social Sciences
(EMFSS) suite of programmes.
Uncertainty is part of life. If we were never in any doubt about the
outcomes of our actions, our time on the planet would be very dull. We all
possess an intuitive sense that some things are more certain than others. If
I knock over a glass of water, I can be pretty sure the contents will spill out;
if I throw a dart at a dartboard, I might hope to hit treble twenty but there
are many other (more likely) outcomes. Science requires us to do more than
make vague statements like I can be pretty sure and there are more likely
outcomes. We need to be able to quantify our uncertainty by attaching
numbers to possible events. Probability is the mechanism by which we
quantify uncertainty; distribution theory provides us with the tools for
building probabilistic models of real world phenomena.
It is important to understand that distribution theory provides a foundation.
The true value of the subject becomes apparent when it is applied to
questions of inference. A couple of examples of inferential questions follow.
1. In the UK, the process of stopping people in the street and searching
them for weapons, drugs or tools for committing burglary is referred
to as stop and search. The police collect information on the number of
crimes and the number of people they have searched each month. Their
hypothesis is that, if they reduce the number of people that they search,
crime goes up. There are a number of questions that we might want to
answer. What distribution provides a reasonable model for the number
of crimes? What is the nature of the association between the number of
crimes and the number of searches? Is there a pattern in the number of
crimes over time?
2. A storm hits northern France. We have measurements of the wind speed
from 100 weather stations and the value of insurance claims from
100,000 locations. Can we use the insurance claims information to build
a more accurate picture of what the wind speeds were across the region
during the storm?
These are questions about what can be inferred from data. We approach these
questions using the mathematical framework provided by distribution theory.
An ability to quantify uncertainty provides an evolutionary advantage;
an animal that can accurately assess the risk (becoming prey) and benet
(catching dinner) of leaving its burrow is more likely to survive than
one that goes out hunting regardless of the danger. Although you might
not be asked to risk your skin in the world of work, a sound knowledge
of distribution theory will give you a competitive advantage in any
quantitative job. Examples of areas of industry where distribution theory
plays a key role include investment banking (particularly quantitative
analyst jobs), insurance and market research. There is also great demand
for skilled statisticians in the public sector; for example, government
statistical services, government departments and law enforcement agencies.
Finally, distribution theory is fundamental to the models used in the
scientific professions. Medical researchers, climate researchers, social