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# Expected value Law of Averages Central Limit Theorem - PowerPoint PPT Presentation

Chapters 16, 17, and 18. Expected value Law of Averages Central Limit Theorem. Box Models. Flipping a coin n times, or rolling the same die n times, or spinning a roulette wheel n times, or drawing a card from a standard deck n times with replacement , …

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### Expected valueLaw of Averages Central Limit Theorem

BoxModels

• Flipping a coin n times, orrolling the same die n times, or

spinning a roulette wheel n times, or drawing a card from a standard deck n times with replacement, …

• Interested in the accumulation of a certain quantity? We can box model the process.

• Actual outcomes are therefore abstractly represented by tickets.

How to Make a Box Model

• First draw a rectangular box.

• Then write next to the box how many times you are drawing from it: n = …

• What tickets go inside the box?

• That depends on what valueyou could add on to a requested quantity each time you draw from the box!

• Then, write the probability of drawing a particular ticket next to that ticket.

• Examples: Chapter 16, #5-8

ExpectedValue

• The expected value of n draws from the box is therefore given by:

• EVn = n*EV1

• The expected value of 1 draw from the box, also called the box average, is given by:

• EV1= weighted average of tickets in box

• = first ticket *probability of drawing first ticket + second ticket *probability of drawing second ticket + …

• “The more you play a box-model-appropriate game, the more likely you get what you see of the box.”

• “What is expected to happen will happen.”

• Examples: Chapter 16, #1, #4

• A consequence of the Law of Averages is that we should not hope to come away with a gain by playing many times – we will eventually come out as a loser if we play long enough.

• The expected value of n draws is given by EVn = n*EV1, where EV1 is the average of the box.

• Now of course our actual accumulated total could differ somewhat from the expectation, and we call our typical deviation standard error, given by:

• SEn = √n *SE1, where SE1 is the standard error of the box.

• Standard error of a box, or standard error of a single play, or standard error of a single draw, all mean the same thing.

• For a box with only two kinds of tickets, valued at A and B respectively, and with probability of p and q of being drawn respectively, the standard error of the box is given by:

• SE1=|A-B|* √(p*q)

• Examples: Chapter 17 #10

ContinuityCorrection

• This is related to the normal table we played with.

• Now the EVn acts as the “Average”

• And SEn acts as the “Standard Deviation”

• Chapter 17, Question 3c

• Continuity Correction is needed when you are dealing with discrete outcomes.

• Suggestion: Draw the normal curve and label the average. Then judge where you want to be and in what direction you should shade; then standardize and look up percentages.

• And so the new version of Standardization Formula:

• When do we know we may use continuity correction?

• That’s when the observed outcomes are discrete.

• For example, if you are counting the number of democrats among a sample of 400 people, you can probably get 0, 1, 2, …, 399 ,or 400, but nothing else between any two numbers (such as 349.97)

• Examples: All questions in Chapter 18 where the box model is a “COUNTING BOX” (box with only 0 and 1)

• A non-example: Height of people in the US

• Example: P(at least break even) = P(actual > -0.5)

• Example: P(lose more than \$10) = P(actual < -10.5)

• Example: P(win more than \$20) = P(actual >20.5)

• Example: P(no more than 2300 heads) = P(actual < 2300.5)

• The basis for what we did is called

Central Limit Theorem.

• The Central Limit Theorem (CLT) states that if…

• We play a game repeatedly

• The individual plays are independent

• The probability of winning is the same for each play

• Then if we play enough, the distribution for the total number of times we win is approximately normal

• Curve is centered on EVn

• Spread measure is SEn

• Also holds if we are counting money won

• Note: CLT only applies to sums! See Chapter 18 Question 10.