Actuarial Discussion Forum - Professional Discussions for Professional Actuaries

 D.W. Simpson & Co, Inc. - Worldwide Actuarial Jobs Life Jobs Health Jobs Pension Jobs Casualty Jobs Salary Apply Pauline Reimer, ASA, MAAA - Pryor Associates Nat'l/Int'l Actuarial Openings: Life P&C Health Pensions Finance ACTEX Publications and MadRiver Books Serving students worldwide for over 40 years Advertise Here - Reach Actuarial Professionals Advertising Information Actuarial Careers, Inc.® - Actuarial Jobs Worldwide Search positions by geographic region, specialization, or salary Ezra Penland Actuarial Recruiters - Top Actuarial Jobs Salary Surveys  Apply Online   Bios   Casualty   Health   Life   Pension

Thread: When to approximate Binomial with Poisson and when with Normal?

1. When to approximate Binomial with Poisson and when with Normal?

My Schaum's outline gives the following criteria for deciding when to approximate a binomial distribution with a Poisson or a Normal distribution:

Poisson: 3 requirements:
(1.) n >> p
(2.) np < 5
(3.) n > 50
Normal:
(1.) n >> p
(2.) np > 5

At first, I thought these guidelines might help me sort out the two cases, because Schaum's says np < 5 for Poisson and np > 5 for Normal, but I've stumbled on a number of exceptions. People will sometimes use Poisson, even though np > 5, provided n is bigger than p by, say, a factor of 10^9.

But I cannot find a consistent pattern here. People eyeball the distribution and make a decision, but I don't have the hang of it yet.

What criteria should I use on SOA Exam P?

2. I don't think they will ask you to transform a binomial into a poisson. But generally, if they want you to use a normal approximation, they will ask for the "approximate" probability of x occuring; I suppose, you can say, that, if your n is large enough and your P is very small, and you are not told to approximate, you can use the poisson approximation. The key is whether they are asking for an approximate probability!
good luck!

3. This is exactly the kind of strategy for interpreting exam questions that I was looking for.

Thanks!!!!!

There are currently 1 users browsing this thread. (0 members and 1 guests)

Posting Permissions

• You may not post new threads
• You may not post replies
• You may not post attachments
• You may not edit your posts