Confidence Intervals

In business, management mainly use confidence intervals to determine the likelihood that data drawn using sampling is representative of the overall population or whole.

What is a confidence interval?

A confidence interval gives the percentage probability that an estimated range of possible values in fact includes the actual value being estimated

How are confidence intervals used in business?

Take two examples:

If a business undertakes primary market research amongst target customer to obtain opinions about a new product launch: how confident can management be that the opinions are representative of all target customers?

When a manufacturing takes samples of finished products from its production line to check for quality: how confident can the business be that the sample of products inspected is representative of all the products being made?

A common confidence interval acceptable to management is 95%. This means that 19 out of 20 samples taken (95%) will give results that are representative of the overall population. Or to put it another way - 1 out of 20 (5%) are unrepresentative!

When the accuracy of sampling is critically important, then the acceptable confidence interval needs to rise.

Why are confidence intervals so useful in business?

• Businesses benefit from the use of statistics in estimating or predicting future events
• A confidence interval helps a business evaluate the reliability of a particular estimate
• Because no estimate can be 100% reliable, businesses need to know how confident they should be in their estimates and whether or not to act on them