Statistical confidence is a useful metric that informs about the reliability and accuracy of estimations made by staff, consultants, and in the news. Confidence scores and ranges are often used to quantify the level of certainty we can have in predictions, analyses, and promises made by vendors. Understanding what these numbers mean offers crucial insights for decision-making in various fields.
What Confidence Scores and Ranges Are
As a refresher for those with business degrees, and a crash course for those with no statistics background, a confidence score is a numerical value that represents the probability that a given prediction or data point is accurate within a specified range. For instance, a confidence score of 95% suggests there is a 95% chance that the data point in question falls within a defined range. This range, often expressed as a lower and upper limit, is known as the confidence interval or confidence range.
Interpreting Confidence Scores
Different confidence scores convey varying degrees of certainty:
1. Low Confidence (Below 90%): A low confidence score indicates substantial uncertainty. This could be due to inadequate data, high volatility, or other confounding variables. Low confidence usually necessitates further investigation.
2. Moderate Confidence (90-95%): This is often considered a reasonable level of confidence for many applications. It indicates a fair degree of certainty but acknowledges the possibility of error.
3. High Confidence (Above 95%): High confidence levels are generally trustworthy and indicate strong evidence. However, even a 99% confidence level doesn't mean there is zero risk of error.
What Confidence Ranges Tell Us
The confidence range or interval provides context for the score. A narrow interval suggests that the data is tightly clustered and the estimate is likely accurate. Conversely, a wide interval indicates greater uncertainty. Typically the range is expressed as an explicite number, such as 125-155 kilograms. In other case, it might be expressed as a % (+/-) from some estimate.
The following are good examples of when confidence scores and ranges are most often used in the real world.
Healthcare Research
Clinical Trials: In drug efficacy studies, a high confidence score (e.g., 95% or above) is crucial for the approval of a new medication. A narrow confidence range further strengthens the case for the drug's effectiveness. Disease Outbreak Prediction: In epidemiology, a moderate to high confidence score might be acceptable for predicting the spread of an infectious disease within a community. A wide range would indicate the need for more data or more sophisticated models.
Financial Markets
Stock Price Prediction and Credit Risk Assessment: In the volatile world of stock markets, even a moderate confidence level can be valuable. Traders often use models that provide a confidence score and range for stock price movement, understanding that while the model may be robust, external factors can still introduce volatility. Financial institutions use statistical models to predict the likelihood of loan default. High confidence scores are sought after, but institutions also prepare for scenarios within the confidence range, including the worst-case scenario.
Automated Valuation Models (AVMs) in Real Estate
Home Valuation: When a lender is assessing the risk of a mortgage, an AVM might provide a property valuation with a confidence score. A high confidence score with a narrow range should expedite the loan approval process. Investment Decisions: Real estate investors may use AVMs to assess the value of potential investment properties. A moderate confidence score with a wider range necessitates additional due diligence like on-site inspections or market analyses.
Machine Learning and AI
Natural Language Processing and Facial Recognition: When transcribing spoken word to text, confidence scores can indicate the likelihood that the transcription is accurate. Higher scores may eliminate the need for human review. In security applications, a high confidence score is crucial. If the system has a low confidence score, it may trigger additional verification methods such as PIN entry or fingerprint scanning.
Understanding the nuances of confidence scores and ranges is crucial for interpreting data and making informed decisions. These metrics are more than just numbers; they offer a statistical narrative about the reliability of the data and the level of risk associated with acting upon it. Whether it's approving a multi-million-dollar loan or releasing a life-saving drug, the appropriate use of statistical confidence can have far-reaching implications.