Confidence intervals are the most valuable statistical tools available to decision makers. However, for a variety of reasons, confidence intervals are not used as frequently as they should. This article answers two questions that are often misunderstood:
- Why are point estimates useless for making decisions?
- What is the best confidence level?
This article does not discuss how to calculate confidence intervals, since widely available software automates this task. Formulas and calculation methods are well documented in many books such as Montgomery (2008) or Sleeper (2006).
Why are Point Estimates Useless for Making Decisions?
Example 1: Suppose I measure the hardness of five steel parts, and the measurements are 57, 55, 57, 56 and 55. The mean of these measurements is 56. Usually, we expect this value to represent something about a larger population of parts. The population mean µ cannot be known with certainty, but the sample mean, 56, is our best estimate of the population mean, based only on these five parts. The number 56 is a point estimate of the population mean.
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