# Bayesian Statistics: Techniques and Models, 1.16 (V) Computing Monte Carlo Error

We can use the central limit theorem to approximate how accurate our Monte Carlo estimates are. For example, if we seek the expected value of theta or the mean of this gamma distribution. Then we can use the sample mean from our simulated values, the simulated theta here. The sample mean of these thetas approximately follows a normal distribution. Where the mean of that normal distribution is the true expected value of theta. And the variance of that normal distribution is the true variance of theta divided by m, our Monte Carlo sample size. That means that if we increase m to be a very large number, the variance of our Monte Carlo estimate gets very small. In other word, our Monte Carlo estimate will be very accurate. To create a standard error for our Monte Carlo estimate, we will use the sample standard deviation divided by the square root of m. So, let's create this variable. The standard error will be the sample standard deviation which is the sd function in r. The sample standard deviation of our simulated values divided by square root of m, or Monte Carlo sample size. We can run this line of code and print off the standard error. This is the standard error of our approximation to the expected value of theta. If we wanted to create a confidence interval for our Monte Carlo approximation. We could look at, for example, two times the standard error. That is, we are reasonably confident, about 95% confident. That the Monte Carlo estimate for the expected value of theta is no more than this far from the true value of the expected value of theta. We can create this confidence interval here. We'll start with our Monte Carlo estimate. And we can take away two standard errors. We'll run that. That gives us the lower edge of our confidence interval. To get the higher, upper edge of our confidence interval, let's change this minus to a plus and run this line. That is, we are reasonably confident after running our Monte Carlo simulation. That the true mean of this gamma distribution is between 5.9 and 6.1. Of course, we've already seen that the true value is 6. These standard errors give us a reasonable range for the quantity we are estimating with Monte Carlo. The same applies for other Monte Carlo estimates. For example, the probability that theta is less than five. Let's recreate that indicator variable that theta is less than 5. We approximated the probability that theta is less than 5 by taking the mean of those indicators. And of course, the true value we can get with the CDF, or pgamma of being less than 5. Where the shape parameter is a and the rate parameter is b. Now, if we want the Monte Carlo standard error for our Monte Carlo estimate. We can calculate it as the standard error is the sample standard deviation of our indicator variables divided by the sqrt(m). Very similar to our standard error that we calculated before but now we're using our new indicator variable. Let's run this and print the value of the standard error. If we look at two times the standard error, We can say that we are quite confident that our Monte Carlo estimate of the probability right here is within 0.01 of the true value. Which is right here. And it looks like, in this case, our Monte Carlo estimate is within 0.01 of the true value. Let's also do the second example where we simulate from a hierarchical model. In our example, we had a binomial random variable where y followed a binomial distribution with ten trials and success probability phi. And phi followed a beta distribution with parameters 2 and 2. To simulate from this joint distribution, we will repeat the following two steps. Here are the two steps. I have written them as two lines of code and commented them out with the pound or hashtag key. The first step is to simulate a phi variable from a beta distribution. And then given that phi variable, we will simulate the ith iteration of the y variable from its corresponding binomial. Where the success probability is the phi that we just drew in step 1. We will repeat these two steps many times to create a Monte Carlo sample from the joint distribution of phi and y. Let's choose the Monte Carlo sample size of 100,000, that is 1 times 10 to the 5th power. That's shorthand for writing 100,000. We can run this line of code to save m in our r session. And before we simulate, let's create the variables before we populate them. The y variable will be a numeric vector with m entries. To see what we just did, let's take a look at the head of y. We initialized a vector of zeroes that has 100,000 entries. We'll populate these with our simulations. Let's do the same with phi And run that line. To follow our algorithm for this joint simulation, we're going to first write a loop in R. To perform a loop in R, we use the keyword for and then we tell it what we're iterating over. We'll iterate over the variable i. For i in 1 to m, repeat the following. To put things inside a loop with many lines of code, we use curly braces. So we'll enter the loop code inside these two curly braces. The first step is to simulate the value of phi. So phi, the i th value of phi will be drawn from a beta distribution. We'll take a single draw with shape1 parameter being equal to 2. And the second shape parameter being equal to 2. Now given that draw for phi, we can simulate a draw for y. The ith simulation for y will come from a binomial distribution. And we want to simulate, so rbinomial. We'll simulate a single draw of a binomial for ten trials. And success probability phi, specifically the phi that we just drew for the ith iteration. This loop will perform this algorithm, we select the entire loop and hold Command and press Return, that runs the code. This took about one half of a second to run in R. However, we can improve on this code. R tends to be very slow with loops. And so one way to speed it up Is to write vectorized code. Here is an example of doing the same simulation with vectorized code. We will first draw all of the phi variables at once, From the beta distribution, but this time we will take m draws From this beta distribution. That will create a vector of phis with those 100,000 simulations. Now, we can simulate y with one line of code by running r binomial. We want m simulations again. Where each simulation has ten trials. And success probability, here we would give it the entire vector of these. In other words we want to draw 100,000 binomials, all with the same number of trials, but all with a different phi. These phis come from our previous simulation. Let's run both of these lines together. And they were almost instantaneous. It is good to avoid writing loops in R if we can by using vectorized code like this. If we are interested only in the marginal distribution of y, we can just ignore the draws for the phis. And treat the draws of y as a sample of its marginal distribution. That distribution will not be a binomial distribution, it'll actually be a beta binomial distribution. Conditional on phi, y follows a binomial distribution. But unconditionally, the marginal distribution of y is not binomial. Let's take a look at that distribution. First, we can do a table of the values of y. This will tell us how often each of the different values of y were drawn in our simulation. So if we run this table we can see how many of the simulations resulted in seven successes, for example. We can divide this by the Monte Carlo sample size to get an approximation of the probabilities. So for example, under the marginal distribution of y, there is approximately 11% chance of three successes. Let's plot this distribution. We'll create a plot of this table And run it. Here is our Monte Carlo approximation of the distribution of y. Again, this is not a binomial distribution. It is actually a beta binomial distribution, the marginal distribution of y. If we're interested in the marginal expected value of y, again we can just ignore the phi variables that we drew. And calculate the mean of our simulated ys, Approximately 5.

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