What is Statistics? Importance, Scope, Limitations

What is Statistics?

Statistics may be defined as the collection, presentation, analysis and interpretation of numerical data.

Statistics is a set of decision-making techniques which helps businessmen in making suitable policies from the available data. In fact, every businessman needs a sound background of statistics as well as of mathematics.

The purpose of statistics and mathematics is to manipulate, summarize and investigate data so that the useful decision-making results can be executed.

Statistics Meaning

The term ‘statistics’ has been derived from the Latin word ‘status’ Italian word ‘statista’ or German word ‘statistik’.

All these words mean ‘Political state’. In ancient days, the states were required to collect statistical data mainly for the number of youngmen so that they can be recruited in the Army.

Also to calculate the total amount of land revenue that can be collected. Due to this reason, statistics is also called ‘Political Arithmetic’.

Statistics Definition

Statistics has been defined in different ways by different authors.

Uses of Statistics in Business Decision Making

Uses of Statistics in Business

The following are the main uses of statistics in various business activities:

• With the help of statistical methods, quantitative information about production, sale, purchase, finance, etc. can be obtained. This type of information helps businessmen in formulating suitable policies.
  
  
• By using the techniques of time series analysis which are based on statistical methods, the businessman can predict the effect of a large number of variables with a fair degree of accuracy.
  
  
• In business decision theory, most of the statistics techniques are used in taking a business decision which helps us in doing the business without uncertainty.
  
  
• Nowadays, a large part of modern business is being organised around systems of statistical analysis and control.
  
  
• By using ‘Bayesian Decision Theory’, the businessmen can select the optimal decisions for the direct evaluation of the payoff for each alternative course of action.

Uses of Mathematics for Decision Making

• The number of defects in a roll of paper, bale of cloth, sheet of a photographic film can be judged by means of Control Chart based on Normal distribution.
• In statistical quality control, we analyse the data which are based on the principles involved in Normal curve.

Uses of Statistics in Economics

Statistics is the basis of economics. The consumer’s maximum satisfaction can be determined on the basis of data pertaining to income and expenditure. The various laws of demand depend on the data concerning price and quantity. The price of a commodity is well determined on the basis of data relating to its buyers, sellers, etc.

Functions of Statistics

Statistics can be well-defined as a branch of research which is concerned with the development and application of techniques for collecting, organising, presenting, analysing and interpreting data in such a manner that the reliability of conclusions may be evaluated in terms of probability statements.

Statistical methods and processes are useful for business development and, hence, applied to enormous numerical facts with an objective that “behind every figure, there’s a story”.

Some key functions of statistics are as follows:

• Condensation
• Comparison
• Forecast
• Testing of hypotheses
• Preciseness
• Expectation

Condensation

Statistics can be used to compress a large amount of data into small meaningful information; for example, aggregated sales forecast, BSE indices, GDP growth rate, etc. It is almost impossible to get a complete idea of the profitability of a company by looking at the records of its income and expenditure. Financial ratios such as return on investment, earnings per share, profit margins, etc., however, can be easily remembered and thus can be used in quick decision making.

Comparison

Statistics facilitate comparing different quantities. For example, the price-to-earnings ratio of ITC as of January 22, 2021 is 19.54 as compared to HUL. HUL is overvalued, quoting a price-to-earnings ratio of 71 times.

Forecast

Statistics helps forecast by looking at trends of a variable. It is essential for planning and decision-making. Predictions or forecasts based on intuition can be disastrous for any business.

For example, to decide the production capacity for a vehicle-manufacturing plant, we need to predict the demand for the product mix, supply of components, cost of manpower, competitor strategy, etc., over the next 5 to 10 years, before committing an investment.

Testing of hypotheses

Hypotheses are statements about population parameters based on knowledge from literature that a researcher would like to test for validity in the light of new information. Drawing inferences about the population using sample estimates involves an element of risk.

Preciseness

Statistics visualises and presents facts precisely in a quantitative form. Facts and information conveyed in quantitative terms are more convincing than qualitative data. For example, ‘increase in profit margin is less in the year 2020 than in the year 2019’ does not convey a precise and complete piece of information.

On the other hand, statistics summarise the information more precisely. For example, ‘profit margin is 5% of the turnover in the year 2020 against 7% in the year 2019’.

Expectation

Statistics can act as the basic building block for framing clear plans and policies. For example, how much raw material to be imported in a year, how much capacity to be expanded, or manpower to be recruited, etc., depends on the expected value of outcome of our decisions taken under different situations.

Importance of Statistics

Statistics in today’s life has become an essential part of various business activities which is clear from the following points.

The importance of statistics in the following major areas:

1. Importance of Statistics in Business and Industry
2. Importance in the Field of Science and Research
3. Importance in the Field of Banking
4. Importance to the State
5. Importance in planning

Importance of Statistics in Business and Industry

In past days, decisions regarding business were made only on personal judgement. However, in these days, they are based on several mathematical and statistical techniques and the best decision is arrived by using all these techniques.

For example, by using the testing hypothesis, we can reject or accept the null hypothesis which are based upon the assumption made from the population or universe

By using ‘Bayesian Decision Theory’ or ‘Decision Theory’, we can select the optimal decisions for the direct evaluation of the payoff for each alternative course of action.

Mathematics and statistics have become ingredients of various decisions problems which is clear from the following:

• In Selecting Alternative Course of Action: The process of business decisions involve the selection of a single action among some set of alternative actions. When there are two or more alternative courses of action, and we need only one course of action, statistical decisions theory helps us in selecting the required course of action by applying Bayesian decision theory and thus saves lot of time.
  
  
• In Removing Uncertainty: In decision-making problems, uncertainty is very common in a situation, when the course of action is not known to us. When there are many possible outcomes of an event, we cannot predict with certainty that what will happen. By applying the concept of joint and conditional probability, the uncertainty about the event can be removed very easily.
  
  
• In Calculating E.O.L., C.O.L., etc.: In business, the opportunity loss is very often, which can be defined as the difference between the highest possible profit for an event and the actual profit obtained for the actual action taken. The expected opportunity loss (E.O.L.) and conditional opportunity loss (C.O.L.) can be easily calculated by using the concept of maximum and minimum criteria of pay-off.

Importance in the Field of Science and Research

Statistics has great significance in the field of physical and natural sciences. It is widely used in verifying scientific laws and phenomenon.

For example, to formulate standards of body temperature, pulse rate, blood pressure, etc. The success of modern computers depends on the conclusions drawn on the basis of statistics.

Importance in the Field of Banking

In banking industry, the bankers have to relate demand deposits, time deposits, credit etc. It is on the basis of data relating to demand and time deposits that the bankers determine the credit policies. The credit policies are based on the theory of probability.

Importance to the State

We know that the subject of statistics originated for helping the ancient rulers in the assessment of their military and economic strength. Gradually its scope was enlarged to tackle other problems relating to political activities of the State.

In the modern era, the role of State has increased and various governments of the world also take care of the welfare of its people. Therefore, these governments require much greater information in the form of numerical figures for the fulfilment of welfare objectives in addition to the efficient running of their administration.

Importance in planning

Planning is indispensable for achieving faster rate of growth through the best use of a nation’s resources. It also requires a good deal of statistical data on various aspects of the economy.

One of the aims of planning could be to achieve a specified rate of growth of the economy. Using statistical techniques, it is possible to assess the amounts of various resources available in the economy and accordingly determine whether the specified rate of growth is sustainable or not.

Scope of Statistics

The following are the main scope of statistics:

1. Presents facts in numerical figures
2. Presents complex facts in a simplified form
3. Studies relationship between two or more phenomena
4. Helps in the formulation of policies
5. Helps in forecasting
6. Provides techniques for testing of hypothesis
7. Provides techniques for making decisions under uncertainty

Presents facts in numerical figures

The first function of statistics is to present a given problem in terms of numerical figures. We know that the numerical presentation helps in having a better understanding of nature an of problem.

Presents complex facts in a simplified form

Generally, a problem to be investigated is represented by a large mass of numerical figures which are very difficult to understand and remember. Using various statistical methods, this large mass of data can be presented in a simplified form.

Studies relationship between two or more phenomena

Statistics can be used to investigate whether two or more phenomena are related. For example, the relationship between income and consumption, demand and supply, etc.

Helps in the formulation of policies

Statistical analysis of data is the starting point in the formulation of policies in various economic, business and government activities.

For example, using statistical techniques a firm can know the tastes and preferences of the consumers and decide to make its product accordingly.

Helps in forecasting

The success of planning by the Government or of a business depends to a large extent upon the accuracy of their forecasts. Statistics provides a scientific basis for making such forecasts.

Provides techniques for testing of hypothesis

A hypothesis is a statement about some characteristics of a population (or universe).

Provides techniques for making decisions under uncertainty

Many times we face an uncertain situation where any one of the many alternatives may be adopted. A businessman might face a situation of uncertain investment opportunities in which he can lose or gain.

He may be interested in knowing whether to undertake a particular investment or not. The answer to such problems are provided by the statistical techniques of decision-making under uncertainty.

Limitations of Statistics

Statistics is considered to be a science as well as an art, which is used as an instrument of research in almost every sphere of our activities.

Some of the limitations of statistics are as follows:

1. Statistics Suits to the Study of Quantitative Data Only
2. Statistical Results are not Exact
3. Statistics Deals with Aggregates Only
4. Statistics is Useful for Experts Only
5. Statistics does not Provide Solutions to the Problems

Statistics Suits to the Study of Quantitative Data Only

Statistics deals with the study of quantitative data only. By using the methods of statistics, the problems regarding production, income, price, wage, height, weight etc. can be studied. Such characteristics are quantitative in nature.

The characteristics like honesty, goodwill, duty, character, beauty, intelligence, efficiency, integrity etc. are not capable of quantitative measurement and hence cannot be directly dealt with statistical methods. These characteristics are qualitative in nature.

In such type of characteristics, only comparison is possible The use of statistical methods is limited to quantitative characteristics and those qualitative characteristics which are capable of being expressed numerically.

Statistical Results are not Exact

The task of statistical analysis is performed under certain conditions. It is not always possible, rather not advisable, to consider the entire population during statistical investigations.

The use of samples is called for in statistical investigations. And the results obtained by using samples may not be universally true for the entire population. Data collected for a statistical enquiry may not be hundred percent true. Statistical results are true on an average.

Statistics Deals with Aggregates Only

Statistics does not recognise individual items. Consider the statement, “The weight of Mr X in the college is 70 kg”. This statement does not constitute statistical data. Statistical methods are not going to investigate anything about this statement. Whereas, if the weights of all the students of the college are given, the statistical methods may be applied to analyse that data.

According to Tippett, “Statistics is essentially totalitarian because it is not concerned with individual values, but only with classes”. Statistics is used to study group characteristics of aggregates.

Statistics is Useful for Experts Only

Statistics is both a science and an art. It is systematic and finds applications in studying problems in Economics, Business, Astronomy, Physics, Medicines etc. Statistical methods are sophisticated in nature. Everyone is not expected to possess the intelligence required to understand and to apply these methods to practical problems. This is the job of an expert, who is well-versed with statistical methods

Statistics does not Provide Solutions to the Problems

The statistical methods are used to explore the essentials of problems. It does not find use in inventing solutions to problems. For example, the methods of statistics may reveal the fact that the average result of a particular class in a college is deteriorating for the last ten years, i.e., the trend of the result is downward, but statistics cannot provide solution to this problem.

It cannot help in taking remedial steps to improve the result of that class. Statistics should be taken as a means and not as an end. The methods of statistics are used to study the various aspects of the data.

Summary

• Statistics is a set of decision-making techniques which helps businessmen in making suitable policies from the available data.
  
  
• “Statistics may be defined as the collection, presentation, analysis and interpretation of numerical data.”
  
  
• With the help of statistical methods, quantitative information about production, sale, purchase, finance etc. can be obtained.
  
  
• Statistics is the basis of economics. The consumer’s maximum satisfaction can be determined on the basis of data pertaining to income and expenditure.
  
  
• By using ‘Bayesian Decision Theory’ or ‘Decision Theory’, we can select the optimal decisions for the direct evaluation of the payoff for each alternative course of action.
  
  
• Statistics is considered to be a science as well as an art, which is used as an instrument of research in almost every sphere of our activities.
  
  
• W.I. King says, “Statistics is a most useful servant but only of great value to those who understand its proper use.”
  
  
• Yule and Kendall has rightly said that “statistical methods are most dangerous tools in the hands of inexperts.”
  
  
• The statistical methods are used to explore the essentials of problems.