14.3 Applications of the central limit theorem

The Central Limit Theorem (CLT) is a game-changer in probability. It tells us that as sample sizes grow, the distribution of sample means gets closer to normal, no matter what the original population looks like. This opens up a world of statistical tools.

CLT lets us estimate probabilities, build confidence intervals, and run hypothesis tests, even when we're dealing with non-normal data. It's the backbone of many statistical methods, making it easier to draw conclusions about populations from sample data.

Approximating Probabilities with CLT

Fundamentals of CLT

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• Distribution of sample means approaches normal distribution as sample size increases, regardless of underlying population distribution
• For large sample sizes (n ≥ 30), sampling distribution of mean approximates normal with mean μ and standard error σ/√n
• Z-score formula for sample means calculates as $z = (x̄ - μ) / (σ/√n)$
  • x̄ represents sample mean
  • μ represents population mean
  • σ represents population standard deviation
  • n represents sample size
• CLT enables normal probability calculations even for non-normally distributed populations (uniform distribution, exponential distribution)

Probability Calculations

• Standard normal distribution table or z-score calculations determine probabilities related to sample means
• When population standard deviation is unknown, sample standard deviation (s) estimates it
  • Results in t-distribution usage instead of z-distribution
• Examples of probability calculations:
  • Probability of sample mean falling within specific range
  • Probability of sample mean exceeding certain value

Confidence Intervals with CLT

Constructing Confidence Intervals

• Confidence interval formula for population mean: $x̄ ± ([critical value](https://www.fiveableKeyTerm:Critical_Value))(standard error)$
  • Critical value depends on chosen confidence level (90%, 95%, 99%)
• For large samples (n ≥ 30), critical value obtained from standard normal distribution (z-distribution)
• Margin of error calculates as product of critical value and standard error
• Width of confidence interval influenced by:
  • Sample size (larger sample, narrower interval)
  • Population variability (higher variability, wider interval)
  • Desired level of confidence (higher confidence, wider interval)

Interpretation and Application

• Confidence interval provides range of plausible values for population mean, not definitive single value
• CLT ensures approximately valid confidence intervals for large samples, even with non-normal population distributions
• Examples of confidence interval applications:
  • Estimating average height of population based on sample
  • Determining range of possible mean test scores for entire school

Hypothesis Testing with CLT

Fundamentals of Hypothesis Testing

• Hypothesis testing compares sample statistic to hypothesized population parameter for population inferences
• Null hypothesis (H₀) assumes no effect or difference
• Alternative hypothesis (H₁) suggests significant effect or difference
• Test statistic for means calculates using formula: $z = (x̄ - μ₀) / (σ/√n)$
  • μ₀ represents hypothesized population mean
• CLT allows z-tests or t-tests for means with large samples, even for non-normal population distributions

Testing Approaches and Considerations

• P-value approach compares calculated p-value to predetermined significance level (α) for null hypothesis decision
• Critical value approach compares calculated test statistic to critical value(s) determined by:
  • Significance level
  • Type of test (one-tailed or two-tailed)
• Important considerations in hypothesis testing:
  • Type I errors (rejecting true null hypothesis)
  • Type II errors (failing to reject false null hypothesis)
• Examples of hypothesis tests:
  • Testing if average weight of product differs from advertised weight
  • Determining if new teaching method improves test scores

Limitations of CLT

Assumptions and Sample Size Considerations

• CLT assumes independent and identically distributed random variables
  • May not hold in real-world scenarios (time series data, clustered data)
• Small sample sizes (n < 30) may not provide sufficiently normal sampling distribution
  • Especially problematic for highly skewed populations (exponential distribution, Pareto distribution)
• Larger sample sizes required for CLT effectiveness with extreme outliers or heavy-tailed distributions (Cauchy distribution)
• CLT does not guarantee normality for individual samples, only for sampling distribution of means across many samples

Scope and Alternative Methods

• CLT primarily concerns sampling distribution of means and sums
  • Does not apply to all types of statistics (medians, ranges)
• For proportions or counts, CLT application differs or alternative methods more appropriate
  • Binomial distribution for proportions
  • Poisson distribution for counts
• Examples of CLT limitations:
  • Small sample inference for highly skewed financial data
  • Analysis of rare events with limited observations