Exponential Distribution

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is Exponential Distribution?

The exponential distribution is a continuous probability distribution that times the occurrence of events. These events are independent and occur at a steady average rate. In other words, it is used to model the time a person needs to wait before the given event happens.

It is a continuous counterpart of a geometric distribution. It is a memoryless random distribution comprising many small values and less large values. It is different from the Poisson distribution — Poisson predicts the number of times an event transpires in a given period and not the time gap.

Key Takeaways

  • The exponential distribution is a probability distribution that anticipates the time interval between successive events. The events should occur continuously and should be independent of each other.
  • This memoryless random distribution facilitates the estimation of an event’s occurrence, success, or failure.
  • It is calculated as:
exponential distribution formula
  • Here x denotes the random variable, and λ is the scale parameter—the reciprocal value of the mean.

Exponential Distribution Explained

Exponential-Distribution-Formula

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In statisticsStatisticsStatistics is the science behind identifying, collecting, organizing and summarizing, analyzing, interpreting, and finally, presenting such data, either qualitative or quantitative, which helps make better and effective decisions with relevance.read more, the exponential distribution function determines the constant rate of time-lapse between the occurrence of two independent and continuous events.

Let us assume, x is a continuous random variable (scale parameter λ > 0). The variable x can have an exponential distribution if it meets the following requirement:

A researcher should be able to express the probability density function of x by multiplying the scale parameter by the exponential function of the minus scale parameter and x (for all x greater than or equal to zero).

If x does not meet the conditions, the probability density function is equal to zero.

In statistics, this concept is used for predicting events’ success, failure, or occurrence. For example, the concept can anticipate the time a potential customer will take to buy a product or service. Similarly, it can determine the frequency of buses at a particular stop or the frequency of earthquakes per year.

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Exponential Distribution Formula

Mathematically, the probability density function is represented as:

exponential distribution formula

Here, f (x; λ) is the probability density function,

λ is the scale parameter which is the reciprocal of the mean value,

x is the random variable.

Calculation

Follow the below steps to determine the exponential distribution for a given set of data:

  1. First, decide whether the event under consideration is continuous and independent. Ascertain if it occurs at a roughly constant rate. For all practical events, the variable should be greater than or equal to zero.
  2. Next, determine the value of the scale parameter. It is invariably the reciprocal of the mean; λ = 1 / mean.
  3. Next, multiply the scale parameter λ and the variable x.
  4. Now, calculate the exponential function of the product multiplied by minus one, i.e., e-λx.
  5. Finally, calculate the probability density function by multiplying the exponential function and the scale parameter.
  6. If the above formula holds true for all x greater than or equal to zero, then x is an exponential distribution.

Similarly, we can compute the following:

Example

You can download this Exponential Distribution Excel Template here – Exponential Distribution Excel Template

Let us determine the amount of time taken (in minutes) by office personnel to deliver a file from the manager’s desk to the clerk’s desk. The function of time taken is assumed to have an exponential distribution with the average amount of time equal to 5 minutes. Also, x is a continuous random variable. Based on the given data, determine the exponential distribution.

Given:

x = time taken to deliver a file in minutes

μ = 5 minutes

Therefore, scale parameter is:

λ = 1 / μ

λ = 1 / 5 = 0.20

ED Formula example 1.1

Hence, the exponential distribution probability function can be derived as,

f (x; λ) = 0.20 e – 0.20*x

Now, calculate the probability function at different values of x to derive the distribution curve.

For x = 0

ED Formula example 1.2

Exponential distribution probability function For x=0 will be,

Exponential Distribution Formula example 1.3

Similarly, calculate exponential distribution probability function for x=1 to x=30

  • For x = 0, f(0) = 0.20 e -0.20*0 = 0.200
  • For x = 1, f(1) = 0.20 e -0.20*1 = 0.164
  • For x = 2, f(2) = 0.20 e -0.20*2 = 0.134
  • For x = 3, f(3) = 0.20 e -0.20*3 = 0.110
  • For x = 4, f(4) = 0.20 e -0.20*4 = 0.090
  • For x = 5, f(5) = 0.20 e -0.20*5 = 0.074
  • For x = 6, f(6) = 0.20 e -0.20*6 = 0.060
  • For x = 7, f(7) = 0.20 e -0.20*7 = 0.049
  • For x = 8, f(8) = 0.20 e -0.20*8 = 0.040
  • For x = 9, f(9) = 0.20 e -0.20*9 = 0.033
  • For x = 10, f(10) = 0.20 e -0.20*10 = 0.027
  • For x = 11, f(11) = 0.20 e -0.20*11 = 0.022
  • For x = 12, f(12) = 0.20 e -0.20*12 = 0.018
  • For x = 13, f(13) = 0.20 e -0.20*13 = 0.015
  • For x = 14, f(14) = 0.20 e -0.20*14 = 0.012
  • For x = 15, f(15) = 0.20 e -0.20*15 = 0.010
  • For x = 16, f(16) = 0.20 e -0.20*16 = 0.008
  • For x = 17, f(17) = 0.20 e -0.20*17 = 0.007
  • For x = 18, f(18) = 0.20 e -0.20*18 = 0.005
  • For x = 19, f(19) = 0.20 e -0.20*19 = 0.004
  • For x = 20, f(20) = 0.20 e -0.20*20 = 0.004
  • For x = 21, f(21) = 0.20 e -0.20*21 = 0.003
  • For x = 22, f(22) = 0.20 e -0.20*22 = 0.002
  • For x = 23, f(23) = 0.20 e -0.20*23 = 0.002
  • For x = 24, f(24) = 0.20 e -0.20*24 = 0.002
  • For x = 25, f(25) = 0.20 e -0.20*25 = 0.001
  • For x = 26, f(26) = 0.20 e -0.20*26 = 0.001
  • For x = 27, f(27) = 0.20 e -0.20*27 = 0.001
  • For x = 28, f(28) = 0.20 e -0.20*28 = 0.001
  • For x = 29, f(29) = 0.20 e -0.20*29 = 0.001
  • For x = 30, f(30) = 0.20 e -0.20*30 = 0.000

Based on data, the following distribution curve is derived:

ED-Formula-example-1.4

Relevance and Uses

In exponential distribution, the number of large values is much smaller than the small ones, which reflects a nearly constant time lapse between the events. The assumption of a regular rate is very rarely satisfied in real-world scenarios. But, if the selected time interval is roughly constant, then the exponential distribution can be used as a good approximate model.

It is one of the extensively used continuous distributions, and it is strictly related to the Poisson distribution in excelPoisson Distribution In ExcelPoisson Distribution is a type of distribution which is used to calculate the frequency of events which are going to occur at any fixed time but the events are independent, in excel 2007 or earlier we had an inbuilt function to calculate the Poisson distribution, for versions above 2007 the function is replaced by Poisson.DIst function.read more. The continuous probability distribution is used for time modeling, reliability modeling, and service time modeling. The concept has extensive application in statistics, physics, hydrology, disaster management, and business.

Frequently Asked Questions (FAQs)

When is the exponential distribution used?

It determines the wait time for the occurrence, success, or failure of an event. For instance, it can be used to determine the approximate time it will take for a consumer to make a purchase.

How to calculate exponential distribution?

The formula is as follows:
ED Formula
Here, f (x; λ) is the probability density function, λ is the scale parameter, and x is the random variable.

What is the difference between Poisson and exponential distribution?

Both are probability distributions, but the Poisson distribution anticipates the number of times an event takes place within a specified period. The exponential representation, on the other hand, predicts the time gap between the occurrence of two independent and continuous events.

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