Quantitative Analysis for Management - I

Theory without practice is sterile; practice without theory is blind . Lenin

Management has at its disposal several approaches in interpreting, analyzing, and solving business problems. Generally, the complexity of the problem indicates the appropriate method of analysis.

The three main approaches are:

Conventional Approach Observational Approach Systematic Approach
Conventional Approach:

It follows past techniques and solutions. Being so static, offers little or nothing to the advancement of management (Since, it is in opposition to the dynamics of business).
Observational Approach:

Is the method of watching and learning managers in similar situations. It, too, is poor but improvements can be applied on occasion to improve particular techniques.
Systematic Approach:

from

other

the concept of theoretical systems, which may be Utilizes somewhat different from the actual problem under study. useful in obtaining a final solution, since, it utilizes a Can be combination of approaches, in particular the scientific method. though scientific management was aimed initially at (Even manufacturingactivities its basic methodology can be applied to most current and future business problems). Management education comprises. becoming aware of the available management techniques knowing the reasons and understanding the process of using them. A technique consists of concepts and principles as also a sequence of steps. Available research on the efficacy of such concepts and techniques provides the justification as

well

as

the

problem conditions for appropriate use.

A detailed discussion of the steps involved in a technique, followed by a demonstration of the technique (in a laboratory setting, simulated environment and/or real-life situation) help build the skill of using the technique. Management education, thus offers the what, why and how of management and also, quite often, provides opportunities for test-application of what has been taught. Koontz, ODonnel & Weihrich, discussing the art and science of management, say in their book: The most productive art is always based on an understanding of the science underlying it. Science and art are not mutually exclusive, but are complementary. Executives who attempt to manage without theory, or knowledge structured by it, are left to rely on what they did, or saw others do or just take a shot in the dark trusting to luck. A theory or organized knowledge base enables managers to design sound and workable solutions to managerial problems. Good management practice is always based on a sound understanding of the relevant theory available at the time. True, there is as yet not science in which everything is known or all relationships proved. Science couldnt, therefore, be a comprehensive tool for the artist. This is true whether one is diagnosing an illness, designing bridges, or managing a company. Management education (be it the MBA, the EMBA or any other programme) must, therefore, offer a blend of theory and practice. The role of the practitioner in the process will have greater impact, when the learner is given both theory and practice as complementary. (Management has to be practical, of course. There is nothing as practical as a good theory).

Quantitative Analysis in Management - II

The word Business Statistics is generally used in two senses:

Statistical Data; and Statistical Methods.

1. Statistical Data: refers to facts expressed in Quantitative Form e.g., , Statistics of Production, Consumption, Unemployment to National Income, Population, etc. Note - The area from which statistical data are collected is generally, referred to as the Population or Universe. 2. Statistical Methods: refers to all such tools and techniques,which are used in : a. Collection; b. Organization (Summarizing); c. Presentation; d. Analysis; and e. Interpretation ..of Statistical Data 2.1 Collection - Constitutes the foundation of statistical analysis. The data is collected from published or unpublished sources or else may be collected by the investigator himself. 2.2 Organization: he first step in organizing a group of data is editing and the next is to classify them according to some common characteristics and the last step in organization is tabulation i.e., to arrange the data in columns and rows. 2.3 Presentation: After the data have been collected and organized, they are presented in orderly manner to facilitate statistical analysis. The two different ways in which the collected data are presented are : Statistical Tables; and Diagrams/Graphs. 2.4 Analysis :Business data are analyzed using techniques such as : Measures of central tendency, Measures of variation, Correlation and Regression Analysis , etc. 2.5 Interpretation: It deals with drawing conclusions from the data collected and analyzed. Since Statistical Methods help in taking decisions, statistics may rightly be regarded as A body of methods for making wise decisions in the face of uncertainty or Statistics is of uncertainty, calculated risks. A. a on method of the basis decision-making of numerical in data, the and face at

Collection of Business Data: Secondary Data

 B. C.

Primary Data Internal Records Types of Classification: Geographical ..area-wise, (cities, districts, etc.) Chronological..on the basis of time. Qualitative (Categorical Data).according to some attributes. Quantitative. in terms of magnitudes.

Frequency Distribution: Is a tabular summary of a set of data that shows the frequency or number of data items that fall in each of several distinct classes. A frequency distribution is also known as a frequency table. Some times, however, we require information on the number of observations whose numerical value is less than a given value this information is contained in the cumulative frequency distribution (cfd). D. Variable: A frequency distribution refers to data classified on the basis of some variable that can be measured such as prices, wages, age, number of units produced or consumed. The term Variable refers to the characteristic that varies in amount or magnitude in a frequency distribution. A variablemay be either continuous or discrete (also called discontinuous). (a) Parts of a Table: Table Number Title of the Table Caption Stub Body of the Table Head Note Foot Note Types of a Table: Simple and Complex Tables General Purpose and Special Purpose Tables Types of Diagrams: One-dimensional diagrams, e.g., bar diagrams: i. Simple bar diagrams ii. Sub-divided bar diagrams iii. Multiple bar diagrams iv. Percentage bar diagrams

(a) 1. 2. (c) 1.

2.

Two-dimensional diagrams: i. Rectangles ii. Squares iii. Circles Pictograms and Cartograms Types of Graphs: Graphs of time series or Line graphs: i. Range graph ii. Band Graph Graphs of frequency distribution: i. Histogram or Column diagram ii. Frequency polygon iii. Frequency Curves iv. Cumulative Frequency Curves or OGIVE

3. (d) 1.

2.

Central Tendency/Dispersion/Skewness/Kurtosis

It may be appreciated that all individual observations comprising a set of data exhibit a tendency to cluster or centre around a specific value. On the whole, they tend to be closer to one particular value than others. This peculiar characteristic of data is referred to as Central Tendency. By its very nature, the value around which individual observations come to cluster, is called the Central Value. Thus, a measure of central tendency of .a set of data lies in obtaining this central value. This idea behind determining such a typical value is to use it as representative of the entire set of data. Three principal measures of central tendency that are widely used in statistical analysis are: (i) arithmetic mean; (ii) median; and (iii) mode, the last two being Location Measures. Two other, relatively much less used measures are: (i) (ii) Geometric Mean (GM); and Harmonic Mean (HM).

Mean ( ) It is calculated by taking the sum of all observations comprising a given set of data and dividing the sum by the total number of observations). It is reliable in that it reflects all the values in the data set. It may be affected by extreme value (very high or low values) (Out Liers). Tedious to compute, because one do use every data point. We are unable to compute mean for a data set that has open-ended classes. Weighted Mean In situations, where the numbers are not equally important, we can assign to each a weight that is proportional to its relative importance and calculate the weighted mean: (i.e it enables us to calculate an average that takes into account the importance of each value to the overall total.) Note: Failure to weight the values when one is combing data is a common error.

Where Wi' s are the weights.

W W

 Median It is the middle value in an ordered array of a set of observations. Extreme values do not affect the median. Easy to understand and can be calculated from any kind of data even for grouped data with open-ended classes. The bad news is that you do give up some accuracy by choosing a single value to represent a distribution, e.g., 2, 4, 5, 40, 100, 213 and 347. The median is 40, which has no apparent relationship to any of the other values in the distribution. Mode (Mo): (most frequently occurring value in a data set) If a distribution has two modes is called Bimodal Distribution. Mode is not unduly affected by extreme values. (Median is not as highly influenced by the frequency of occurrence of a single value as is the Mode, nor is it pulled by extreme values as is the mean). Warning Before you do any calculating, take a common sense look at the data themselves. If the distribution looks unusual, just about any thing you calculate from it. Will have shortcomings. Otherwise, there are no universal guidelines for applying the mean, median, or mode as the measure of central tendency for different populations. Geometric Mean (GM): We use the Geometric Mean to Show multiplicative effects over time in compound interest and inflation calculations. It is specifically useful when it is desired to produce an average of percentage changes. ( e.g. rate of growth of population / rate of growth of Industrial production / rate of increase in sales/costs/prices etc. in one period over the other). Hint: Use GM whenever you are calculating the average percentage change in some variable overtime. Harmonic Mean (HM): Is particularly useful in averaging rates and ratios. It is the most appropriate average when we are calculating the average speed of a vehicle, when the speed is expressed in kilo meters per hour, etc Also useful in which values of a variable are compared with a constant quantity of another variable i.e rates,time,distance covered within certain time and quantities purchased or sold per unit ,etc.

 Dispersion: To increase our understanding of the pattern of data, we must also measure its dispersion its spread or variability. This additional information enables us to judge the reliability of our measure of the central tendency. Avid choosing the distribution with the greatest dispersion : For Example: Widely dispersed earnings those varying from extremely high to low or even negative levels indicate a high risk to stockholders and creditors. A drug that is average in purity but ranges from very pure to highly impure may endanger lives.

Different methods of dispersion are: Range, Quartile Deviation, Mean Deviation, and Standard Deviation.

Two most important measures of Dispersion are: The Variance and the Standard Deviation: Both of these tell us an average distance of any observation in the data set from the mean of the distribution. i.e how for individual items in a distribution depart from the mean of the distribution. (A ) data set with a large standard deviation has much dispersion with values widely scattered around its mean, and a data set with a small standard deviation has little dispersion with the values tightly clustered around its mean). Note: The square root of a +ve numbers may be either +ve or ve, because a2 = (-a2). When taking the square root of the Variance to calculate Standard Deviation, however, statisticians consider only the +ve square root. Relative Measures of Dispersion : ( Give us a feel for the magnitude of the deviation relative to the magnitude of the mean). Different methods of Relative measures of dispersion are : Coefficient of Range, Coefficient of Quartile Deviation, Coefficient of Mean Deviation, Coefficient of Standard Deviation, Coefficient of Variation (CV)

(Do not compare the dispersion in data sets by using their standard deviations unless their means are close to each other)

************************************* :s : s2

Sample Mean:

Sample Standard Deviation Sample Variance

************************************* Population Mean : Population Standard Deviation : Population Variance :

************************************* -1) as the denominator instead of n?

each sample, and average each of these together, then this average tends not to equal the population variance ( 2) unless we use (n-1) as the denominator. -1) makes the sample variance (s2) a better estimator of the population variance (2) in the sense that it is not biased downward. Since, the standard deviation is the (Positive) square root of the variance, we proceed using s as the estimator of Sheppards Correction:

Variance and Standard Deviation computed from grouped data always contain some error because of grouping of individual observations into different classes, called grouping. Sheppards correction is a factor used for correcting variance for grouping errors. It is 1/12 of the square of the width of class interval C, which is deducted from the computed variance. That is, Corrected Variance = Computed Variance C2/12 (where C2/12 is known as Sheppards Correction for variance) It is applicable only in the case of frequency distributions of continuous variables. Note: Statisticians are however, not in agreement over the utility of using the correction factor. This owes to the fear that it may lead to over-correction and may thus introduce fresh error. What is generally agreed upon is that the correction factor is not to be used without thorough examination of the problem. Standard Score: A the number of

measure called the standard deviations of

standard

score gives us particular observation

lies below or above the mean. If we let x symbolize the observation, the standard score computed from population data is: Population Standard Score = (x ), [Where x = observation from the population; = population mean; and = population standard deviation]. For Example, Suppose we observe a vial of compound that is 0.108% impure. Let Population Mean is 0.166 and Population Standard Deviation is 0.058. An observation of 0.108 would have standard score of: (x )/ = (0.108 0.166)/0.058 = -1 An observation of 0.282% would have a standard score of = (0.282 0.166)/0.058 = +2 The standard score indicates that an impurity of 0.282% deviates from the mean by 2(0.058)=0.116 unit, which is equal to +2 in terms of the number of standard deviations away from the mean Comparing the Mean/Median/Mode: Symmetrical distributions that contain only one mode always have the same value for the mean, the median and the mode. In these cases, we need not choose the measure of central tendency because the choice has been made. Measures of Skewness: (Quantifies the extent of departure from symmetry, and also indicates the direction in which the departure takes place). Positively (Right hand side) Skewed: There are just a few high extreme values on the right side These extreme values raise the Mean of the data but do not affect the median so the mean will be greater than the median. Negatively (Left hand side) Skewed: A few extremely low values are on the left side which pulls the mean down so mean will be less than the median. The relative values of mode, median and mean can therefore tell us whether the distribution is skewed to the left or right.

Symmetric distribution (no skewness)

Negatively skewed

Positively skewed

Note: When population is skewed to the right or left, the Median is often the best measure of location because it is always between the Mean and the Mode. The Median is not as highly influenced by the frequency of occurrence of a single value as is the Mode, nor is it pulled by extreme values as is the mean. Otherwise, there are no universal guidelines for applying the mean, median, or mode as the measure of central tendency for different populations. Each case must be judged independently, according to the guidelines we have discussed.

 Kurtosis: Can be used to show the degree of concentration, either the values concentrated in the area around the mode (a peaked curve) or decentralized from the mode to both tails of the frequency curve (a flat- topped curve). Kurtosis in Greek means Bulginess. In statistics Kurtosis refers to the degree of flatness or peaked-ness in the region about the mode of a frequency curve. `The degree of Kurtosis of a distribution is measured relative to the peaked- ness of a normal curve. If a curve is more peaked than the normal curve it is called LeptoKurtic. If more flat topped than the normal curve then it is called or Flat Topped. The normal curve itself is known as Mesokurtic.

Example( Of : A company in table uses three grades of labour to produce two end products.. and wants to know the average cost of labour per hour for each of the product. Grades Labour Hourly Wage Labour Hours Per Unit Output Product-1 Product-2 Unskilled $5 1 4 Semi-skilled 7 2 3

Skilled 9 5 3 Total (Hours of Labour) 8 10 Using this average rate, we would compute the labour cost of one unit of Product-1 to be: Product-2 to be: 7(1+2+5) 7(4+3+3) = $56 and = $70

(But these answers are incorrect) To be correct, the answers must take into account that different amounts of each grade of labour are used: i.e., find weighted average: Xw = [( W x X)/ W].We weight the hourly wage for each grade by its proportion of the total labour required to produce the product: Product-1 1 Unskilled out of 8 hours 2 Semi-skilled out of 8 hours 5 Skilled out of 8 hours Similarly, Product-2 1 Unskilled out of 8 hours 2 Semi-skilled out of 8 hours 5 Skilled out of 8 hours For Product-1: Xw = [(1/8 x 5) + (2/8 x 7) + (5/8 x 9)]/(1/8 + 2/8 + 5/8) = $ 8 per hour For Product-2: Xw = [(4/10 x 5) + (3/10 x 7) + (3/10 x 9)]/(4/10 + 3/10 + 3/10) = $6.8 per hour W 4/10 3/10 3/10 W 1/8 2/8 5/8

Data Analysis (Western Electronics Manufacturing) (Absence Example) Table below represents the number of employees absent from work each day at a Western Electronics Manufacturing Plant over the last 106 working days.

(Absence Example) FREQUENCY DISTRIBUTION: 1. Equation for Determining the Approximate Number of Classes:

(1)
The actual number of classes is the integer value that just exceeds the value obtained from equation (1) for the approximate number of classes. The approximate number of classes is: = [2(106)]0.333 = 5.96 6 Classes 2. Equation for Determining the Approximate Class Interval or Width:

(2) = (158-121)/6 = 37/6 = 6.17 7 Width

3. To use a class interval of 6.17 that is not a whole number multiple of the basic unit (an absence in our example) is very inconvenient, so we will use an interval of the next Highest Integer Value of 7. 4. Now we have a span of: 6 x 7 = 42 values but actual span is : 158 121 = 37 values.

5.

The

classes will

overlap the

span

of

the

actual data values by 42 37 = 5 units.

6. Determine the class boundaries : Class boundaries must be selected so that the classes cover all the actual data values and so that each data value falls in a distinct class. The lower boundary for the first class is an arbitrary but convenient value below the lowest data value. Then find the upper boundary for the first class by adding the class width to the lower boundary. Find the boundaries for the remaining classes by successively incrementing by the class width until all the class boundaries have been determined. Find the frequency for each class and present the results in a table. 7. This 5 is adjusted in the lower (first class) not fully but: half only: (5) = 2.5 units below 121. Class Limits 119-125 126-132 133-139 140-146 147-153 154-160 Class Boundaries 118.5-125.5 125.5-132.5 132.5-139.5 139.5-146.5 146.5-153.5 153.5-160.5 Frequency 1 4 26 59 15 1

N = 106 (Sturges Rule: K = 1 + 3.322 [log (n)], where n = Number of Observations )

HISTOGRAM: 1** 2** 3** 4** When raw data are grouped into classes, a certain amount of information is lost, since no distinction is made between observations falling in the same class. The larger the class interval or width is, the greater is the amount of information lost. For the employee absence data a class interval of 15 is so large that the corresponding histogram gives very little idea of the shape of the distribution ( figure: 1a ). A class interval of 2, in contrast, gives a ragged histogram ( figure :1c )little information has been lost, but the presentation is somewhat misleading.

5** Thus, the rule for determining the approximate number of classes, will likely produce histograms between the extremes of giving too much detail or giving too little ( figure : 1b ). . however, the number of classes may need to be adjusted for some sets of data in order to obtain a clearer presentation of the information.

n : Ogive . 1***Just as a frequency distribution can be represented graphically by a histogram, a cumulative frequency distribution is represented graphically by an OGIVE.

Figure-2

2*** From Ogive , we may, for example, get an approximation for the number of observations whose numerical value is less than 150 by finding the height of the curve over that point. 3*** With the help of the dashed line in Figure-2(a), we approximate that on 98 days, fewer than 150 employees were absent. 4** If we convert the cumulative frequencies to cumulative relative frequencies, by dividing each cumulative frequency by the number of observations in the data set (there are 106 observations), then we have a Cumulative Relative Frequency Distribution (CRFD), Figure-2(b). 5** 6** 7** The primary use of a CRFD is to approximate percentiles. A Percentile is essentially a value below which a given proportion of the values in a data set fall. With the help of the dashed lines of Figure-2(b), our approximations 75th percentiles are 139, 141 and 145. of the 25th, 50th and

Figure-2

8** 9** 10** 11** 12** 13** 14** 15**

In other words, we approximate that the value 139 exceeds 25% of all the absence values. The 25th, 50th and 75th percentiles are termed the first, second, and third quartiles, respectively. Thus the first, second, and third quartiles (Q1, Q2 and Q3) are approximately 139, 141 and 145. The terms quantile and fractile are general terms that refer to any of the percentile or quartile values that measures positions in the data set. Fractile is a term used more by Statisticians than by the rest of us, who are more familiar with 100 fractiles, or percentiles, especially when our percentile score on the CAT is involved. When we get that letter indicating that our percentile score was 95, we know that 95 percent of those taking the test did worse than we did. For example, the 0.50 quantile or fractile is the same as the 50th percentile, the median, and the second quartile. Hence, the approximation for the 0.50 quantile is 141. (Di): There are 9 deciles that divide the frequency distribution into 10 equal

parts].

(Pk): equal parts].

There are

99

percentiles

which divide the frequency distribution into 100

PROBABILITY Probability Theory Probability Theory (Probability Theory is of great value in Managerial Decision Theory)

and debatable subject in recent years.

For example, We often find people making such statements as: It is likely that it may rain. We probably will get the contract. It is possible that the price of our shares may go down further, etc.

specifying the meaning of these statements. h we are unable to forecast the future with complete certainty. Theory. . ability constitutes the foundation of statistical theory and application. -making under uncertainty. -making in business and in government with the means for quantifying the uncertainties which affect his choice of appropriate actions. uncertainty in business situations in such a way that he can assess systematically the risk involved in each alternative, and consequently act to minimize risks. imals (0.25, 0.50, 0.125) between zero and 1. something will always happen. comes of doing something.

Theory as an experiment. Using this Formal Language: We could ask the question Experiment what is the probability of the event Head (i.e., 1/2). The set of all possible outcomes of an experiment is called the sample space. In coin-toss experiment, the sample space is: S = {Head, Tail}. In the Card-Drawing Experiment, the sample space has 52 members. Types of Events: 1. Favourable Events 2. Mutually Exclusive Events 3. Equally Likely Events 4. Collectively Exhaustive Events 5. Compound Events 6. Dependent Events 7. Independent Events in a coin-toss

these events occur at

favourable event. re mutually exclusive if there is no outcome that belongs to both sets. Can two or more of one time, if the answer is Yes, the events are not mutually exclusive.

said to be collectively exhaustive. equally likely if they have equal chance of happening in an experiment . compound events. Compound Events can be either Dependent or Independent .

event has no effect on the Probability of the occurrence of any other event.

upon or affected by the occurrence of some other event. Types of Probability There are three basic ways of classifying probability. 1. Classical Approach 2. Relative Frequency Approach or Empirical Approach 3. Subjective Approach All of them define Probability as a ratio or proportion. 1. Classical Approach

Above to be valid .. each of the possible outcomes must be equally likely. the e.g., probability of an event without even we can compute performing experimental trials

P (Head ) = 1/2

If there are a possible outcomes favourable to the occurrence of an event E, and b possible outcomes unfavourable to the occurrence of E and all these possible outcomes are equally likely and mutually exclusive, then the probability that a will occur, denoted by P(E) is: (E) a= a/(a+b) = Number of outcomes favourable to concurrence of E Total Number of Outcomes

unbiased dice, and standard decks of cards, we can state the answer in advances (a priori) without toss a coin, rolling a die, or drawing a card i.e., we need not to perform experiments to make our probability statements.

Drawbacks of Classical Approach Not applicable to the less orderly decision problems we encounter in management. trouble. -life situations, disorderly and unlikely as they often are, make it useful to define Probabilities in other ways. Principles of Insufficient Reasons

the name of Bayes (Englishman 1702-1761). His famous hypothesis states that:

An interesting application of this principle is the toss of a fair coin: i) ii) How do we know that a fair coin has a probability of 0.5 showing head and probability of 0.5 showing tail? Since, there is no logical reason for a coin coming up one way versus another, the probabilities must be equal or 0.5 because there are only two possibilities. 2. Relative Frequency of Occurrence Defined Through Experimentation or Empirical Approach: Suppose we begin asking ourselves complex questions such as: What is the probability that I will live up to 85? What is the Probability that the location of a new paper plant on the river near our town will cause a substantial fish kill? What is the Probability that a production process used by a particular firm will produce a defective? We see that we may not be able to state in advance, without experimentation, what these probabilities are?

ested in a theoretical foundation for calculating risk of losses in life insurance and commercial insurance, began defining probabilities from statistical data collected on births and deaths. Today this approach is called relative Frequency of Occurrence. It defines probability as either: (1) The observed relative frequency of an event in a very large number of trials, or (2) The proportion of times that an event occurs in the long run when conditions are stable. s of past occurrences as probabilities. will happen again in the future.

i.e., the Probability is determined objectively by repetitive empirical observations. If says that the only valid procedure for determining event probabilities is through repetitive experiments. 3. Subjective Probabilities (Based on Intuition, Judgement, Educated Guess, Experience): Are based on the beliefs of the person making the probability assessment. In fact, can be defined as the probability assigned to an event by an individual based on whatever evidence is available, this evidence may be just an educated guess. Subjective Probability assignments are frequently found when events occur only once or at most a very few times. For Example, You have to select one person out of three: Each has an attractive appearance, A high level of energy; Abounding self-confidence, A record of past accomplishments, and A state of mind that seems to welcome challenges. Assuming this question and choosing among the three will require you to assign a subjective Probability to each persons. Since most higher level social and managerial decisions are concerned with specific, unique solutions, rather than with a long series of identical situations, decision-maker at this level make considerable use of subjective probabilities. The subjective approach to assigning probabilities was introduced in 1926 by Frank Ramsey in his book, the Foundation of Mathematics and other Logical Essays. The concept was further developed by Bernard Koopman, Richard Good, and Leonard Savage, names that appear regularly in advanced work in this field. The two people who made opposing bets on the outcomes of the Football game would understand quite well what he meant. Probability Rules Most Managers who use probabilities are concerned with two conditions: 1. 2. The case where one event or another will occur. The situation where two or more events will both occur.

We are interested in the first case when we ask : What is the Probability that todays demand will exceed our inventory? To illustrate the second situation, we could ask : What is the probability that todays demand will exceed our inventory and that more than 10 percent of our sales force will not report for work. Commonly used Symbols in Probability Theory, we use symbols to simplify the presentation of ideas. P(A) = is the Probability of Event A happening P(B) = is the Probability of Event B happening etc. Types of Probabilities : Simple/Marginal Probability Conditional Probability Joint Probability Objective Probability Subjective Probability Prior Probability Posterior Probability Simple or Unconditional Probability, are also known as Marginal Probability: A Single Probability means that only one event can take place. It is called a simple or unconditional probability. Symbolically , P(A) is a Simple Probability of event A Properties of Probabilities : Property 1 : If A is an event, then : 0 P (A) 1 Property 2 : The sample space contains all possible outcomes of the experiment. Thus .. P(S) =1 Property 3 : If event A is mutually Exclusive of event B, then : P ( A or B ) = P(A) + P(B) Venn Diagram = Is a Pictorial representation Developed by English Mathematician, John Venn. In this, the entire sample space is represented by a rectangle and events are represented by parts of the rectangle. Theorems in Probability Theory : Addition Theorem Multiplication Theorem Bayes Theorem Addition Theorem : P(A or B)=P(A)+P(B)if events are mutually exclusive Venn Diagram .

P(A or B)=P(A)+P(B) P(AB)if events are not strictly mutually exclusive

Multiplication Theorem : P(A and B) = P(A) P(B)..if events are Independent P(A and B) = P(A) P(B/A).if events are Dependent Venn Diagram

A and B are independent events if : P(B/A) = P(B) Or, in words, A and B are independent events whenever A gives no information about the probability of B. Complementary Events : If ______ is the complement of event A , then : P(____) = 1-AP(A)

Probabilities Under Statistical Independence and Dependence

Joint Probability Table

Bayes Theorem : We often have to obtain the additional information in the form of samples, surveys, tests, or experiments that can be used to revise probabilities. (e.g., a consultant may be retained to provide information). Or, tests such as blood tests, credit tests, or tests of raw materials may be used to obtain sample information that can be used to revise probabilities. The sample information provides conditional probabilities. Bayes theorem combines the prior probabilities and the conditional probabilities to give revised or posterior probabilities that reflect the sample information. The revised probabilities can enrich the analysis of probability problems and eventually to improved decisions .

Bayes Theorm: B1, B2, Bn are mutually exclusive and collectively exhaustive P(B2), .P( Bn) , and events with prior probabilities : P(B1),

B2,.A given Bn are: P(A /B1) , P(A/B2)P( A/ Bn).

n , are known.

P(B1 / A) = P(B1 ) P( A / B1 ) // P(B1 ) P( A / B1 ) P(B2 ) P( A / B2 ) ......P(Bn ) P( A / Bn ) PROBABILITY TREE: 1. 2. 3. 4.

..

Probability Tree Diagrams depict events or sequences of events as branches of a tree. Each branch of the tree is labeled to indicatewhich event it represents. Along each branch is given the probability of the event occurrence, given that the sequences of the events have reached that point in the tree. Thus all the branches that emanate from one point must be: (i) Mutually exclusive; and (ii) Collectively exhaustive.

i.e.,they must represent distinct events, and they must account for all possible events that can occur at that point. Example: The chance that someone has a particular disease is 0.02. A test that identifies this disease gives a positive reaction in 97% of the people who have the disease, but it also gives a positive reaction in 5% of the people who do not have the disease. Given that you have just received a positive reaction from this test, what is the probability that you have the disease?

Solution: the end of the top branch or the third one down. at the ends of these two branches.

sum.

P(Disease / Positiv e) = 0.0194/(0.0194 + 0.0490) = 0.0194/0.0684 = 0.2836

the disease and A denote the positive test. Example: A company has 245 customers that are classified in the table below by the frequency with which they place a regular or an irregular order and by their payment terms, cash or credit.

I) Probability that a randomly selected customer is either a regular or a credit customer; ii) Probability that a randomly selected customer is both a credit customer and orders irregularly.

SCALES AND MEASUREMENT: Certain scales have been devised that will allow us to measure our variables of interest. A scale is a tool or mechanism by which individuals are distinguished on the variables of interest to our study, in some form or the other. The scale or tool could be a gross one in the sense that it would only broadly categorize individuals on certain variables; or it could be a fine-tuned tool that would differentiate individuals on the variables with varying degrees of sophistication There are four basic types of scales: nominal, ordinal, interval, and ratio. The degree of sophistication to which the scales are fine-tuned increases as we move from the nominal to the ratio scale.

Nominal scale : is usually used for obtaining personal data such as gender, department in which one is working, and so on, where grouping of individuals or objects is useful, as in the case below: 1. Your gender --- Male --- Female 2. Your department --- Production --- Sales --- Accounting --- Finance --- Personal --- R & D --- Other Ordinal Scale : is usually used to rate the performance or usage of various brands of a product by individuals and to rank order individuals, objects , or events, as per the example below.

1. Rank the following personal computers with respect to their usage in your office, assigning the number 1 to the most used system, 2 to the next most used, and so on. If a particular system is not used at all in your office, put a zero against it. ---IBM/AT --- Compaq --- IBM/ XT --- Dell --- Apple --- Other (Specify) --- MacIntosh --- Zenith

Interval scale : is used when responses to various items that measure a variable can be tapped on a five-point (or sevenpoint or any other number of points) scale, which can thereafter be summated across the items. See example of a Likert scale below. Using the scale below, please indicate your response to each of the items that follow by circling the number that best desribes your feeling

Ratio scales : usually get used in organizational research when exact figures on objective (as opposed to subjective) factors are called for, as in the following questions: 1. 2. How many other organizations did you work for before joining this system? ---Please indicate the number of children you have in each of the following categories:

--- below 3 years of age --- between 3 and 6 --- over 6 years but under 12 --- 12 years and over 3. How many retail outlets do you operate? ---- The responses could range from 0 to any figure.

Nominal Ordinal Interval Ratio Scales

Research Methods Table of Contents in Research (Project ) Report 1) Problem Statement 2) Review of Literature 3) Hypothesis Formulation 4) Research Design & Sample Design 5) Data Collection 6) Data Processing 7)Data Analysis & Hypothesis Testing 8) Interpretation 9) Report Writing

Some Important

Questions

Why should we do research? What research should be done? Is it worth doing the research? How should the research be designed to achieve the research objectives? What will we do with the research?

Research Process Five Key Steps 1. Define Problem 2. Formulate Research Design 3. Collect Data 4. Prepare and Analyze Data 5. Prepare and Present Report Problem Definition Process

Defining the problem is the most important step Two types of problems: Management Problem action oriented Research Problem information oriented

Sampling Techniques Sampling Fundamentals When Is Census Appropriate? Population size itself is quite small Information is needed from every individual in the population Cost of making an incorrect decision is high Sampling errors are high Sampling Fundamentals (Contd.) When Is Sample Appropriate? Population size is large Both cost and time associated with obtaining information from the population is high Quick decision is needed More time can be spent on each interview, thereby increasing response quality Easier to manage surveys of smaller samples Population being dealt with is homogeneous Used if census is impossible

Error in Sampling Total Error - Error in Sampling Difference between the true value and the observed value of a variable Sampling Error Error is due to sampling Non-sampling Error Error is observed in both census and sample Measurement Error Data Recording Error Data Analysis Error Non-response Error Terms Used in Sampling Universe Sampling unit-home/office/person Sampling frame

Sampling Process Identifying the Target Population Determining the Sampling Frame Selecting a Sampling Frame Probability Non-Probability Sampling Sampling Determining the Relevant Sample Size Execute Sampling Data Collection From Respondents Information for Decision-Making Sampling Techniques Probability Sampling All population members have a known probability of being in the sample Simple Random Sampling Each population member, and each possible sample, has equal probability of being selected Stratified Sampling The chosen sample is forced to contain units from each of the segments or strata of the population

Reconciling the Population, Sampling Frame Differences

Handling the Non-Response Problem

Types of Stratified Sampling Proportionate Stratified Sampling Number of objects/sampling units chosen from each group is proportional to number in population Can be classified as directly proportional or indirectly proportional stratified sampling Disproportionate Stratified Sampling Sample size in each group is not proportional to the respective group sizes Used when multiple groups are compared and respective group sizes are small Directly Proportionate Stratified Sampling

Inversely

Proportional Stratified Sampling

If the opinion of the exporters are valued more than that of non-exporters, more firms should be sampled from the exporters group. In that case, inversely proportional stratified sampling may be used. If a sample size of 60 is desired, a 10 percent inversely proportional stratified sampling is employed.

In inversely proportional stratified sampling, the selection probabilities are computed as follows:

Denominator Exporters proportion and sample size Non-exporters proportion and sample size

600/200 + 600/400 = 3 + 1.5 = 4.5 3/ 4.5 = 0.667; 0.667 * 60 = 40 1.5 / 4.5 = 0.333; 0.333 * 60 = 20

Cluster Sampling Involves dividing population into subgroups Random sample of subgroups/clusters is selected and all members of subgroups are interviewed Very cost effective Useful when subgroups can be identified that are representative of entire population

Comparison of Stratified and Cluster Sampling Stratified sampling -Homogeneity within group -Heterogeneity between groups -All groups are included -Sampling efficiency improved by increasing accuracy at a faster rate than cost Cluster sampling -Homogeneity between groups -Heterogeneity within groups -Random selection of groups -Sampling efficiency improved by decreasing cost at a faster rate than accuracy

Systematic Sampling Involves systematically spreading the sample through the list of population members commonly used in telephone surveys Non-Probability Sampling Costs and trouble of developing sampling frame are eliminated Results can contain hidden biases and uncertainties Types of Non Probability Sampling Judgmental "Expert" uses judgment to identify representative samples

Snowball Form of judgmental sampling Appropriate when reaching small, specialized populations Each respondent, after being interviewed, is asked to identify one or more others in the appropriate group Judgmental "Expert"

uses

judgement

to

identify representative samples

Snowball Form of judgmental sampling Appropriate when reaching small, specialized populations Each respondent, after being interviewed, is asked to identify one or more others in the appropriate group.

Convenience Used to obtain information quickly and inexpensively Quota Minimum number from each specified subgroup in the population Often based on demographic data Non Response Problems Respondents may: Refuse to respond Lack the ability to respond Be inaccessible Sample size has to be large enough to allow for non response Those who respond may differ from non respondents in a meaningful way, creating biases Seriousness of non-response bias depends on extent of non response Solutions to Non-response Problem Improve research design to reduce the number of non-responses Repeat the contact one or more times (call back) to try to reduce non-responses Attempt to estimate the non-response bias Basic Statistics Population Mean Variance Standard Deviation Sample Size N Sample X s2 s n

DECISION

MAKING

Decision Analysis ( A)*** Meaning :-1. Making decisions is an integral and continuous aspect of human life. 2. Decision Theory in business today play an makes decisions. 3. The act of decision making enters into almost all of a managers noted social scientist has used the term decision synonymous with managing: Managers They must must reach decisions to

important role in helping managers activities. Indeed, a making as though it were

about objectives and plans for their organizational units to organize, how to control.

decide how

direct, how

They must not only make many decisions but guide subordinates in reaching decisions of their own. What does this process of decision making involve?

What is a decision? How we can analyze and systematize the solving of certain types of decision problems? **** The answer to these and similar questions form the subject matter of decision theory. 4. 5. Decision theory is rich, complex, growing and interdisciplinary subject.

Since we live in a world, where the course of future events cannot be predicted with absolute certainty, the best we can do is to reach approximate solutions based upon the likelihood of possible future events. We assign a certain value to Probability, which can range from 0 to 1. Zero being completely pessimistic and one being completely optimistic about the occurrence of a particular event under certain conditions. Hence,**** Decision making is the act of selecting a preferred course of action among alternatives From this definition one can conclude that decisions are involved in almost all facets of life. Once it is known that a choice must be made, there is no escape from decision making. One may postpone the final choice, but this too is a decision----not to make a choice at present.

6.

7. 8. 9.

C)*** Types of Decisions:- Decisions are of three kinds from the view point of decision theory, viz: a) Strategic decisions b) Managerial decisions c) Operating decisions D*** Steps in Decision-Making:i. Recognition of the Need for a Decision. ii. Identification of objectives i.e. analyzing the problem and gathering information. iii. Search for Reasonable Alternatives i.e. developing alternative solutions. iv. Evaluation of Alternatives.

v. vi.

Selection of Implementation

Alternatives i.e. i.e. converting Risk,

Deciding upon the decision

the best solution; and into effective action.

E.***DM

Under Certainty,

Uncertainty

and ompetitive Conditions:-

General Features: a. Alternative courses of actions or acts or strategies..the objective is to select the best of these alternatives from among the total set. (A strategy is a set of decisions that completely determines a course of action ). b. Conditions outside the control of the decision maker that will determine the consequences of a particular act. These conditions, sometimes termed events or states of nature, must be mutually exclusive and all possible conditions must be listed (collectively exhaustive ). c. Payoff or maker of loss, as particular a of measure of the benefit to the decision nature resulting from a particular course of action. of what constitutes the objective being sought

state

d.

Some criterion or by the decision maker. An environment will occur.

measure

e.

representing

the

extent of

knowledge about the state of nature that

a.

The first three elements listed above are often displayed in a decision matrix to organize some of the features of a situation into an orderly format.b. The alternatives, Si, are listed as column headings, the events, Ni, are listed as rows headings, or vice versa. The consequences, Pij body of the appropriate alternative (Payoffs matrix and or Losses), are then displayed within the at the intersection of the the appropriate event.

c.

Illustrative Decision Matrix: Alternatives Acts or Strategies States of Nature (Events)

N1

N2

Nn

S1 S2 . .

P11 P21 . .

P12 P22 . .

P1n P2n . .

Sm

Pm1

Pm2

Pmn

G. Decision Environment a. Certainty: The b.

decision

maker knows which state will

of nature will occur. occur but can estimate

Risk: The decision maker does not know which state of nature the probability that any one state will occur. Uncertainty: estimate The the decision probabilities

c.

maker lacks sufficient information even of the possible states of nature.

to

Selection of Best Criterion Depending on how much we know about the states of nature environment, we can refer to decisions making under: 1. 2. 3. 4. Certainty Risk Uncertainty Competitive conditions or the business