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Lecture 1
Lecture 1
Auto correlation
Hetrosekasdicity
Dummy variables.
Logit model
Probit model
Panel data
Course Overview ….
Books
• Quantitative Methods for Business by Anderson Sweeny and Williams
• Quantitative analysis for management by Render, Stair, Hanna
• One must understand the specific applicability of the technique, its limitations, and
its assumptions
Definition
• Quantitative Technique: Any procedure, formulae, instrument, model that helps in
analyzing any hypothesis, theory, statement is called quantitative techniques.
• In Quantitative analysis, we may be interested in predicting Y with X, or with the
casual effect of X on Y.
• Quantitative analysis is a scientific approach to decision making whereby raw data
are processed and manipulated resulting in meaningful information.
• Raw data--application of QT----Meaningful information
Qualitative versus quantitative analysis
Qualitative Quantitative
Subjective Objective
Quantitative factors
Might be different investment levels, interest rates, inventory levels, demand, or labor cost
Qualitative factors
such as the weather, state and federal legislation, and technology breakthroughs should also be
considered. Political instability
Information may be difficult to quantify but can affect the decision-making process
Why Study Quantitative Techniques
In your everyday life, it will help you make sense of what to heed and what to ignore in statistical
4- It can save time and money in decision making and problem solving
5- It may be the only way to solve large or complex problems in a timely fashion
It is a systematic process
1- Define the problem
It is a starting point
In the real world, quantitative analysis models can be complex, expensive and time
consuming.
2- Developing a Mathematical Model
What a Model is?
A model is simply a set of mathematical equations.
Multiple-equation model
Mathematical models that do not involve risk are called deterministic models.
We know all the values used in the model with complete certainty.
probabilistic models
Profit function
3- Specification of the probabilistic/econometric Model
variables.
Error term is proxy for all the omitted variables but collectively affect Y.
Unavailability of data
Core versus peripheral variables- joint effect of many variable is so small that
for practical consideration and cost effectiveness it does not pay to introduce
Principle of parsimony
To estimate the Statistical model given/ obtain the numerical values of β1 and β2 ,
we need data.
Data may come from a variety of sources such as company reports, company
documents, interviews.
– Solving equations
– Trial and error – trying various approaches and picking the best result
6- Hypothesis Testing/testing the solution
parameter.
7- Forecasting or Prediction
• If the chosen model does not refute the hypothesis or theory under consideration,
• we may use it to predict the future value(s) of the dependent variable Y on the basis
of known variables.
• Many quantitative analysis efforts have failed because a good, workable solution was
Beginning assumptions
Validity of data
Ratio scale
2- The sum of the simple probabilities for all possible outcomes of an activity must be
equal to 1.
Examples:
Quantity Demanded Number of days
0 40 p=40/200 (.20)
1 80 p=80/200 (.40)
2 50 p=(50/200) (.25)
3 20
4 10
Types of probability
Examples
• For this opinion polls are conducted and then probabilities are found.
Mutually exclusive and collectively exhaustive events
Mutually exclusive events : If only one of the event can occur on any one trial.
Collectively exhaustive events: They are said to be mutually exhaustive if the list
include all the possible outcomes i.e. A U B= S.
• Examples: Drawing a 5 and drawing a diamond from a deck of cards- it can be both
5 and diamond
Adding mutually exclusive events
• We are interested in whether one event or second event will occur.
• When events are mutually exclusive the law of addition is simply as follows.
• P(event A or event B)= p(event A)+ p(event B)
• Drawing spade or drawing a club out of a deck card are mutually exclusive. 13/52+13/52=1/2
• Venn diagram
• Venn diagram
• Examples:
• In a math class of 30 students, 17 are boys and 13 are girls. On a unit test, 4 boys and 5 girls
made an A grade. If a student is chosen at random from the class, what is the probability of
4- Product rule
5- Quotient rule
6- Chain rule
Predictand Predictor
Regressand Regressor
Response Stimulus
Endogenous Exogenous
Outcome Covariate
LHS RHS