What Is the Empirical Rule?

The Empirical Rule, also known as the 68-95-99.7 Rule, is a concept in statistics that helps to calculate the probability of a certain event occurring. The rule states that for a normal distribution, approximately 68% of values will fall within one standard deviation of the mean, 95% of values will fall within two standard deviations, and 99.7% of values will fall within three standard deviations.

Examples of Empirical Rule in Business and Finance

The Empirical Rule is often used in business and finance to help make decisions. For example, you can use the rule to analyze stock prices. Suppose you analyze the past prices of Microsoft stock and find that the mean price is $60, and the standard deviation is $6. Using the Empirical Rule, you can estimate that approximately 68% of the time, the stock is going to be priced between $54 and $66. This can help inform decisions about when to buy and sell stock.

Another example is using the Empirical Rule to understand customer demand. Suppose you analyze the data from the past year and find out that the mean amount of product sold is 10,000 units and the standard deviation is 2,000. The Empirical Rule predicts that 68% of the time, you will sell between 8,000 and 12,000 units. This can help you estimate the demand for your product and adjust your inventory accordingly.

How to Use the Empirical Rule

The Empirical Rule can be used to help make decisions in business and finance. To use the rule, first identify the mean and standard deviation of the data. Then, calculate the number of standard deviations away from the mean that you want to calculate the probability for. For example, if you want to know the probability of a stock price falling within one standard deviation of the mean, you would calculate the probability of the stock being between the mean minus one standard deviation and the mean plus one standard deviation.

Finally, use the percentages in the Empirical Rule to calculate the probability. For example, if you calculate that a stock price is between one standard deviation of the mean, the probability is 68%. This can help you make decisions about when to buy and sell stocks or estimate customer demand for your product.