examples of hypothesis testing in finance

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What Is Hypothesis Testing?

Step 1: define the hypothesis, step 2: set the criteria, step 3: calculate the statistic, step 4: reach a conclusion, types of errors, the bottom line.

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Hypothesis Testing in Finance: Concept and Examples

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Your investment advisor proposes you a monthly income investment plan that promises a variable return each month. You will invest in it only if you are assured of an average $180 monthly income. Your advisor also tells you that for the past 300 months, the scheme had investment returns with an average value of $190 and a standard deviation of $75. Should you invest in this scheme? Hypothesis testing comes to the aid for such decision-making.

Key Takeaways

• Hypothesis testing is a mathematical tool for confirming a financial or business claim or idea.
• Hypothesis testing is useful for investors trying to decide what to invest in and whether the instrument is likely to provide a satisfactory return.
• Despite the existence of different methodologies of hypothesis testing, the same four steps are used: define the hypothesis, set the criteria, calculate the statistic, and reach a conclusion.
• This mathematical model, like most statistical tools and models, has limitations and is prone to certain errors, necessitating investors also considering other models in conjunction with this one

Hypothesis or significance testing is a mathematical model for testing a claim, idea or hypothesis about a parameter of interest in a given population set, using data measured in a sample set. Calculations are performed on selected samples to gather more decisive information about the characteristics of the entire population, which enables a systematic way to test claims or ideas about the entire dataset.

Here is a simple example: A school principal reports that students in their school score an average of 7 out of 10 in exams. To test this “hypothesis,” we record marks of say 30 students (sample) from the entire student population of the school (say 300) and calculate the mean of that sample. We can then compare the (calculated) sample mean to the (reported) population mean and attempt to confirm the hypothesis.

To take another example, the annual return of a particular mutual fund is 8%. Assume that mutual fund has been in existence for 20 years. We take a random sample of annual returns of the mutual fund for, say, five years (sample) and calculate its mean. We then compare the (calculated) sample mean to the (claimed) population mean to verify the hypothesis.

This article assumes readers' familiarity with concepts of a normal distribution table, formula, p-value and related basics of statistics.

Different methodologies exist for hypothesis testing, but the same four basic steps are involved:

Usually, the reported value (or the claim statistics) is stated as the hypothesis and presumed to be true. For the above examples, the hypothesis will be:

• Example A: Students in the school score an average of 7 out of 10 in exams.
• Example B: The annual return of the mutual fund is 8% per annum.

This stated description constitutes the “ Null Hypothesis (H 0 ) ” and is  assumed  to be true – the way a defendant in a jury trial is presumed innocent until proven guilty by the evidence presented in court. Similarly, hypothesis testing starts by stating and assuming a “ null hypothesis ,” and then the process determines whether the assumption is likely to be true or false.

The important point to note is that we are testing the null hypothesis because there is an element of doubt about its validity. Whatever information that is against the stated null hypothesis is captured in the  Alternative Hypothesis (H 1 ).  For the above examples, the alternative hypothesis will be:

• Students score an average that is not equal to 7.
• The annual return of the mutual fund is not equal to 8% per annum.

In other words, the alternative hypothesis is a direct contradiction of the null hypothesis.

As in a trial, the jury assumes the defendant's innocence (null hypothesis). The prosecutor has to prove otherwise (alternative hypothesis). Similarly, the researcher has to prove that the null hypothesis is either true or false. If the prosecutor fails to prove the alternative hypothesis, the jury has to let the defendant go (basing the decision on the null hypothesis). Similarly, if the researcher fails to prove an alternative hypothesis (or simply does nothing), then the null hypothesis is assumed to be true.

The decision-making criteria have to be based on certain parameters of datasets.

The decision-making criteria have to be based on certain parameters of datasets and this is where the connection to normal distribution comes into the picture.

As per the standard statistics postulate  about sampling distribution , “For any sample size n, the sampling distribution of X̅ is normal if the population X from which the sample is drawn is normally distributed.” Hence, the probabilities of all other possible sample mean that one could select are normally distributed.

For e.g., determine if the average daily return, of any stock listed on XYZ stock market , around New Year's Day is greater than 2%.

H 0 : Null Hypothesis: mean = 2%

H 1 : Alternative Hypothesis: mean > 2% (this is what we want to prove)

Take the sample (say of 50 stocks out of total 500) and compute the mean of the sample.

For a normal distribution, 95% of the values lie within two standard deviations of the population mean. Hence, this normal distribution and central limit assumption for the sample dataset allows us to establish 5% as a significance level. It makes sense as, under this assumption, there is less than a 5% probability (100-95) of getting outliers that are beyond two standard deviations from the population mean. Depending upon the nature of datasets, other significance levels can be taken at 1%, 5% or 10%. For financial calculations (including behavioral finance), 5% is the generally accepted limit. If we find any calculations that go beyond the usual two standard deviations, then we have a strong case of outliers to reject the null hypothesis.  

Graphically, it is represented as follows:

In the above example, if the mean of the sample is much larger than 2% (say 3.5%), then we reject the null hypothesis. The alternative hypothesis (mean >2%) is accepted, which confirms that the average daily return of the stocks is indeed above 2%.

However, if the mean of the sample is not likely to be significantly greater than 2% (and remains at, say, around 2.2%), then we CANNOT reject the null hypothesis. The challenge comes on how to decide on such close range cases. To make a conclusion from selected samples and results, a level of significance is to be determined, which enables a conclusion to be made about the null hypothesis. The alternative hypothesis enables establishing the level of significance or the "critical value” concept for deciding on such close range cases.

According to the textbook standard definition , “A critical value is a cutoff value that defines the boundaries beyond which less than 5% of sample means can be obtained if the null hypothesis is true. Sample means obtained beyond a critical value will result in a decision to reject the null hypothesis."   In the above example, if we have defined the critical value as 2.1%, and the calculated mean comes to 2.2%, then we reject the null hypothesis. A critical value establishes a clear demarcation about acceptance or rejection.

This step involves calculating the required figure(s), known as test statistics (like mean, z-score , p-value , etc.), for the selected sample. (We'll get to these in a later section.)

With the computed value(s), decide on the null hypothesis. If the probability of getting a sample mean is less than 5%, then the conclusion is to reject the null hypothesis. Otherwise, accept and retain the null hypothesis.

There can be four possible outcomes in sample-based decision-making, with regard to the correct applicability to the entire population:

The “Correct” cases are the ones where the decisions taken on the samples are truly applicable to the entire population. The cases of errors arise when one decides to retain (or reject) the null hypothesis based on the sample calculations, but that decision does not really apply for the entire population. These cases constitute Type 1 ( alpha ) and Type 2 ( beta ) errors, as indicated in the table above.

Selecting the correct critical value allows eliminating the type-1 alpha errors or limiting them to an acceptable range.

Alpha denotes the error on the level of significance and is determined by the researcher. To maintain the standard 5% significance or confidence level for probability calculations, this is retained at 5%.

According to the applicable decision-making benchmarks and definitions:

• “This (alpha) criterion is usually set at 0.05 (a = 0.05), and we compare the alpha level to the p-value. When the probability of a Type I error is less than 5% (p < 0.05), we decide to reject the null hypothesis; otherwise, we retain the null hypothesis.”  
• The technical term used for this probability is the p-value . It is defined as “the probability of obtaining a sample outcome, given that the value stated in the null hypothesis is true. The p-value for obtaining a sample outcome is compared to the level of significance."  
• A Type II error, or beta error, is defined as the probability of incorrectly retaining the null hypothesis, when in fact it is not applicable to the entire population.  

A few more examples will demonstrate this and other calculations.

A monthly income investment scheme exists that promises variable monthly returns. An investor will invest in it only if they are assured of an average $180 monthly income. The investor has a sample of 300 months’ returns which has a mean of $190 and a standard deviation of $75. Should they invest in this scheme?

Let’s set up the problem. The investor will invest in the scheme if they are assured of the investor's desired $180 average return.

H 0 : Null Hypothesis: mean = 180

H 1 : Alternative Hypothesis: mean > 180

Method 1: Critical Value Approach

Identify a critical value X L for the sample mean, which is large enough to reject the null hypothesis – i.e. reject the null hypothesis if the sample mean >= critical value X L

P (identify a Type I alpha error) = P(reject H 0  given that H 0  is true),

This would be achieved when the sample mean exceeds the critical limits.

= P (given that H 0  is true) = alpha

Graphically, it appears as follows:

Taking alpha = 0.05 (i.e. 5% significance level), Z 0.05  = 1.645 (from the Z-table or normal distribution table)

           = > X L  = 180 +1.645*(75/sqrt(300)) = 187.12

Since the sample mean (190) is greater than the critical value (187.12), the null hypothesis is rejected, and the conclusion is that the average monthly return is indeed greater than $180, so the investor can consider investing in this scheme.

Method 2: Using Standardized Test Statistics

One can also use standardized value z.

Test Statistic, Z = (sample mean – population mean) / (std-dev / sqrt (no. of samples).

Then, the rejection region becomes the following:

Z= (190 – 180) / (75 / sqrt (300)) = 2.309

Our rejection region at 5% significance level is Z> Z 0.05  = 1.645.

Since Z= 2.309 is greater than 1.645, the null hypothesis can be rejected with a similar conclusion mentioned above.

Method 3: P-value Calculation

We aim to identify P (sample mean >= 190, when mean = 180).

= P (Z >= (190- 180) / (75 / sqrt (300))

= P (Z >= 2.309) = 0.0084 = 0.84%

The following table to infer p-value calculations concludes that there is confirmed evidence of average monthly returns being higher than 180:

A new stockbroker (XYZ) claims that their brokerage fees are lower than that of your current stock broker's (ABC). Data available from an independent research firm indicates that the mean and std-dev of all ABC broker clients are $18 and $6, respectively.

A sample of 100 clients of ABC is taken and brokerage charges are calculated with the new rates of XYZ broker. If the mean of the sample is $18.75 and std-dev is the same ($6), can any inference be made about the difference in the average brokerage bill between ABC and XYZ broker?

H 0 : Null Hypothesis: mean = 18

H 1 : Alternative Hypothesis: mean <> 18 (This is what we want to prove.)

Rejection region: Z <= - Z 2.5  and Z>=Z 2.5  (assuming 5% significance level, split 2.5 each on either side).

Z = (sample mean – mean) / (std-dev / sqrt (no. of samples))

= (18.75 – 18) / (6/(sqrt(100)) = 1.25

This calculated Z value falls between the two limits defined by:

- Z 2.5  = -1.96 and Z 2.5  = 1.96.

This concludes that there is insufficient evidence to infer that there is any difference between the rates of your existing broker and the new broker.

Alternatively, The p-value = P(Z< -1.25)+P(Z >1.25)

= 2 * 0.1056 = 0.2112 = 21.12% which is greater than 0.05 or 5%, leading to the same conclusion.

Graphically, it is represented by the following:

Criticism Points for the Hypothetical Testing Method:

• A statistical method based on assumptions
• Error-prone as detailed in terms of alpha and beta errors
• Interpretation of p-value can be ambiguous, leading to confusing results

Hypothesis testing allows a mathematical model to validate a claim or idea with a certain confidence level. However, like the majority of statistical tools and models, it is bound by a few limitations. The use of this model for making financial decisions should be considered with a critical eye, keeping all dependencies in mind. Alternate methods like  Bayesian Inference are also worth exploring for similar analysis.

Sage Publications. " Introduction to Hypothesis Testing ," Page 13.

Sage Publications. " Introduction to Hypothesis Testing ," Page 11.

Sage Publications. " Introduction to Hypothesis Testing ," Page 7.

Sage Publications. " Introduction to Hypothesis Testing ," Pages 10-11.

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Home > Finance > Hypothesis To Be Tested: Definition And 4 Steps For Testing With Example

Hypothesis To Be Tested: Definition And 4 Steps For Testing With Example

Published: December 6, 2023

Learn about the definition of a hypothesis to be tested and the 4 steps involved in testing it, with a practical example in finance.

• Definition starting with H

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Unlocking the Secrets of Hypothesis Testing in Finance: A Step-by-Step Guide

Greetings, finance enthusiasts! Today, we dive into the fascinating world of hypothesis testing – a powerful tool used by financial analysts and researchers to make informed decisions and drive data-driven strategies. In this blog post, we’ll explore the definition of hypothesis testing, outline the four crucial steps involved, and provide a real-life example to help you better understand its application in the financial realm.

Key Takeaways:

• Hypothesis testing is a statistical method used to validate or reject assumptions made about a specific population based on sample data.
• The four steps of hypothesis testing include stating the hypothesis, setting the significance level, calculating the test statistic, and interpreting the results to make a conclusion.

What is Hypothesis Testing?

In finance, where decisions can have significant financial implications, hypothesis testing plays a vital role in minimizing risks and maximizing returns. Put simply, hypothesis testing is a statistical method used to validate or reject assumptions made about a specific population based on sample data. By applying this method, financial analysts can make confident predictions or decisions based on the available evidence.

Now, let’s dive into the four essential steps involved in hypothesis testing:

Step 1: State the Hypothesis

The first step in hypothesis testing is to clearly state the null hypothesis (H0) and the alternative hypothesis (Ha). The null hypothesis represents the assumption we want to test, while the alternative hypothesis suggests an alternate outcome or direction. For example, in finance, we might want to test whether a particular investment strategy outperforms the market average (null hypothesis) or if it underperforms (alternative hypothesis).

Step 2: Set the Significance Level

The significance level (α) represents the probability of rejecting the null hypothesis when it is true. Typically, it is set at 0.05, indicating a 5% chance of making a Type I error (rejecting the null hypothesis when it is actually true). The significance level helps us determine the critical value or test statistic necessary for making a decision.

Step 3: Calculate the Test Statistic

The test statistic is a numerical value that summarizes the sample data and allows us to compare it with the expected population values. The choice of test statistic depends on the nature of the hypothesis being tested. Commonly used test statistics in finance include t-tests, z-tests, and chi-square tests. By calculating the test statistic, we can quantify the likelihood of observing the sample data given the null hypothesis.

Step 4: Interpret the Results and Make a Conclusion

Finally, after calculating the test statistic, we compare it with the critical value associated with our chosen significance level. If the test statistic falls within the critical region, we reject the null hypothesis in favor of the alternative. Conversely, if it falls outside the critical region, we fail to reject the null hypothesis. By interpreting the results, we can draw conclusions and make data-driven decisions in the financial domain.

Let’s illustrate these steps with a real-life example: Suppose a finance researcher wants to determine if a new investment strategy results in a significantly higher average return than the market average. Here’s how they would go about testing this hypothesis:

• Hypotheses: The null hypothesis (H0) would state that the new investment strategy’s average return is equal to the market average, while the alternative hypothesis (Ha) would state that the new strategy’s average return is higher.
• Significance Level: Set α at 0.05.
• Test Statistic: Calculate the t-statistic by comparing the sample average return with the market average return, considering sample size and variability.
• Interpret the Results: If the calculated t-statistic falls within the critical region, we reject the null hypothesis, indicating that the new investment strategy indeed results in a significantly higher average return.

By following these four steps, financial analysts can leverage hypothesis testing to gain insights, validate assumptions, and make informed decisions, ultimately leading to financial success.

Understanding the power of hypothesis testing is crucial to thriving in the ever-changing landscape of finance. Incorporating this statistical tool enables finance professionals to analyze data effectively, manage risks, and confidently navigate the complex world of investments. So, embrace the power of hypothesis testing and unlock a world of possibilities in finance!

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A Beginner’s Guide to Hypothesis Testing in Business

• 30 Mar 2021

Becoming a more data-driven decision-maker can bring several benefits to your organization, enabling you to identify new opportunities to pursue and threats to abate. Rather than allowing subjective thinking to guide your business strategy, backing your decisions with data can empower your company to become more innovative and, ultimately, profitable.

If you’re new to data-driven decision-making, you might be wondering how data translates into business strategy. The answer lies in generating a hypothesis and verifying or rejecting it based on what various forms of data tell you.

Below is a look at hypothesis testing and the role it plays in helping businesses become more data-driven.

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What Is Hypothesis Testing?

To understand what hypothesis testing is, it’s important first to understand what a hypothesis is.

A hypothesis or hypothesis statement seeks to explain why something has happened, or what might happen, under certain conditions. It can also be used to understand how different variables relate to each other. Hypotheses are often written as if-then statements; for example, “If this happens, then this will happen.”

Hypothesis testing , then, is a statistical means of testing an assumption stated in a hypothesis. While the specific methodology leveraged depends on the nature of the hypothesis and data available, hypothesis testing typically uses sample data to extrapolate insights about a larger population.

Hypothesis Testing in Business

When it comes to data-driven decision-making, there’s a certain amount of risk that can mislead a professional. This could be due to flawed thinking or observations, incomplete or inaccurate data , or the presence of unknown variables. The danger in this is that, if major strategic decisions are made based on flawed insights, it can lead to wasted resources, missed opportunities, and catastrophic outcomes.

The real value of hypothesis testing in business is that it allows professionals to test their theories and assumptions before putting them into action. This essentially allows an organization to verify its analysis is correct before committing resources to implement a broader strategy.

As one example, consider a company that wishes to launch a new marketing campaign to revitalize sales during a slow period. Doing so could be an incredibly expensive endeavor, depending on the campaign’s size and complexity. The company, therefore, may wish to test the campaign on a smaller scale to understand how it will perform.

In this example, the hypothesis that’s being tested would fall along the lines of: “If the company launches a new marketing campaign, then it will translate into an increase in sales.” It may even be possible to quantify how much of a lift in sales the company expects to see from the effort. Pending the results of the pilot campaign, the business would then know whether it makes sense to roll it out more broadly.

Related: 9 Fundamental Data Science Skills for Business Professionals

Key Considerations for Hypothesis Testing

1. alternative hypothesis and null hypothesis.

In hypothesis testing, the hypothesis that’s being tested is known as the alternative hypothesis . Often, it’s expressed as a correlation or statistical relationship between variables. The null hypothesis , on the other hand, is a statement that’s meant to show there’s no statistical relationship between the variables being tested. It’s typically the exact opposite of whatever is stated in the alternative hypothesis.

For example, consider a company’s leadership team that historically and reliably sees $12 million in monthly revenue. They want to understand if reducing the price of their services will attract more customers and, in turn, increase revenue.

In this case, the alternative hypothesis may take the form of a statement such as: “If we reduce the price of our flagship service by five percent, then we’ll see an increase in sales and realize revenues greater than $12 million in the next month.”

The null hypothesis, on the other hand, would indicate that revenues wouldn’t increase from the base of $12 million, or might even decrease.

Check out the video below about the difference between an alternative and a null hypothesis, and subscribe to our YouTube channel for more explainer content.

2. Significance Level and P-Value

Statistically speaking, if you were to run the same scenario 100 times, you’d likely receive somewhat different results each time. If you were to plot these results in a distribution plot, you’d see the most likely outcome is at the tallest point in the graph, with less likely outcomes falling to the right and left of that point.

With this in mind, imagine you’ve completed your hypothesis test and have your results, which indicate there may be a correlation between the variables you were testing. To understand your results' significance, you’ll need to identify a p-value for the test, which helps note how confident you are in the test results.

In statistics, the p-value depicts the probability that, assuming the null hypothesis is correct, you might still observe results that are at least as extreme as the results of your hypothesis test. The smaller the p-value, the more likely the alternative hypothesis is correct, and the greater the significance of your results.

3. One-Sided vs. Two-Sided Testing

When it’s time to test your hypothesis, it’s important to leverage the correct testing method. The two most common hypothesis testing methods are one-sided and two-sided tests , or one-tailed and two-tailed tests, respectively.

Typically, you’d leverage a one-sided test when you have a strong conviction about the direction of change you expect to see due to your hypothesis test. You’d leverage a two-sided test when you’re less confident in the direction of change.

4. Sampling

To perform hypothesis testing in the first place, you need to collect a sample of data to be analyzed. Depending on the question you’re seeking to answer or investigate, you might collect samples through surveys, observational studies, or experiments.

A survey involves asking a series of questions to a random population sample and recording self-reported responses.

Observational studies involve a researcher observing a sample population and collecting data as it occurs naturally, without intervention.

Finally, an experiment involves dividing a sample into multiple groups, one of which acts as the control group. For each non-control group, the variable being studied is manipulated to determine how the data collected differs from that of the control group.

Learn How to Perform Hypothesis Testing

Hypothesis testing is a complex process involving different moving pieces that can allow an organization to effectively leverage its data and inform strategic decisions.

If you’re interested in better understanding hypothesis testing and the role it can play within your organization, one option is to complete a course that focuses on the process. Doing so can lay the statistical and analytical foundation you need to succeed.

Do you want to learn more about hypothesis testing? Explore Business Analytics —one of our online business essentials courses —and download our Beginner’s Guide to Data & Analytics .

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Reasonable Deviations

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© Robert Andrew Martin 2023. All rights reserved. Disclaimer.

Hypothesis testing in quant finance

At its core, science is about making falsifiable hypotheses about the world (Popper), testing them experimentally, then using the experiment outcomes to refute or refine the hypotheses. The scientific method is an integral part of quantitative finance; it provides a framework we can use to identify and analyse trading signals or anomalies.

In this short post, we discuss a general method for hypothesis-testing in finance, using Monte Carlo simulations to compute the probability that an observed signal can be explained by random chance.

This post is an expanded version of a Twitter thread I wrote. The supporting code can be found in this notebook .

Hypothesis testing and p-values

As a necessary prelude, we first discuss a somewhat controversial topic: the p-value.

Wikipedia defines the p-value as:

the probability of obtaining test results at least as extreme as the results actually observed, under the assumption that the null hypothesis is correct

With a definition like this, it’s no surprise that p-values are so widely misinterpreted. We can try and understand the intuition behind p-values by considering an example.

Let’s imagine that we want to find out whether some new teaching method X (e.g. forcing students to make flashcards) improves test scores versus the default method Y. A simple approach is to split the cohort of 100 students into two groups, making 50 of them do X and the other 50 do Y. We can then compare the average score between the two cohorts.

The problem arises when we try to interpret the results. If the X students had an average grade of 70%, while the control group had an average of 60%, did X really improve test results or was it a random fluke? How about if it was 60.1% vs 60.0%? Or 80% vs 50%?

This is where hypothesis testing comes in. We set up a null hypothesis and test whether there is sufficient evidence to reject the null hypothesis. In our example, the null might be that there is no difference between the mean scores of the X and Y groups.

To test this, we assume that the null hypothesis is true – that X doesn’t actually improve test scores – and compute the probability that we would see X have an average score of 70% vs the control group’s 60%. This probability is the p-value.

At the risk of being imprecise (and thereby perpetuating the misinterpretations of p-values), I think of the p-value as the probability that random data can explain your results .

The trouble with p-values

One of the major criticisms with p-values is that they answer the wrong question. We aren’t truly after “the probability that random data can explain your results”. We actually want to know the probability that X causes test results to improve, given the observed data. To answer questions like this, a different box of tools is needed – I’d highly recommend Judea Pearl’s The Book of Why if you’re interested in learning more – but for now we will proceed under the assumption that the p-value is indeed a statistic of interest.

Even then, there is a subtle issue that we glossed over above. The p-value can only be calculated if we assume that the quantity of interest is drawn from a particular probability distribution. In our example, we can’t actually “compute the probability that we would see X have an average score of 70% vs the control group’s 60%” unless we make some assumption about the distribution of test score (typically a normal distribution or t-distribution is used).

In finance, these types of assumptions rarely hold. Furthermore, we are often looking to test more complicated hypotheses, such as “this time series is stationary” or “this data is normally distributed”. You might be lucky enough to find that someone has already figured out how to test a particular hypothesis – for instance, the augmented Dickey-Fuller test can be used to test for stationarity and Jarque-Bera for normality. But generally, properly calculating p-values is hard!

The good news is that we often don’t need to properly calculate a p-value. Monte Carlo simulations can give us “quick and dirty” estimates of the p-value that might be good enough.

Case study: ETF seasonality

I came across a tweet from Mitchell Rosenthal in which he observes that the iShares Singapore ETF (ticker EWS) shows positive returns in 89% of April months from 2002-2020. This seems like an interesting anomaly, but with only 19 Aprils, it certainly seems plausible that this anomaly could be generated by random chance alone (remember: the probability of this is quantified by the p-value).

Firstly, let’s replicate his findings. I downloaded data for the EWS ETF going back to 1996 and calculated how often each month had a positive return.

A bar chart showing the fraction of up-months is shown below:

81% of April months showed positive returns. There is a discrepancy with respect to Mitchell’s results of 89%, likely because I used more data and a slightly different methodology for calculating returns. However, I think it is fair to say that we have replicated the anomaly.

With this in mind, a suitable null hypothesis might be “there is no seasonality in EWS returns”. To estimate a p-value, we need to generate many alternate EWS price series assuming there is no seasonality, then count the number of runs in which we nevertheless see an 81% seasonality. It is worth taking a moment here to convince yourself that this procedure does indeed give you the p-value.

The hard part here is simulating new EWS price series under the null hypothesis that there is no seasonality. How can we do this without assuming a distribution of returns? How can we create alternative realities in which everything is the same about EWS, except that it has no seasonality?

Here’s one solution: for each Monte Carlo run, construct a price series from the shuffled daily returns of the EWS time series. This generates alternative paths of EWS with the same mean and volatility as the original EWS time series (since these formulae are invariant under reorderings), but by shuffling, we are ensuring that there is no seasonality in the data-generating process.

Note that this doesn’t mean that any given Monte Carlo run will lack seasonality – the whole point of this exercise is to see how often a path will show seasonality given that there is no actual seasonality (i.e assuming the null hypothesis is true).

I generated 10,000 paths by reshuffling returns. For each path, I stored the maximum seasonal return (i.e for each month, calculate the percentage of months which had positive returns, then take the maximum percentage).

It turns out that only 72 out of the 10,000 paths had seasonalities as high as 80% (remember that we observed 81% in real life).

We therefore see that the p-value – the probability that we observe 80% seasonality purely by random chance (no actual seasonality) – is approximately equal to 0.7%.

Using the standard 5% significance level, we reject the null hypothesis and conclude that this anomaly is statistically significant.

Advice on setting up experiments

There is a slight art in figuring out how to set up these Monte Carlo hypothesis tests – it may not be immediately obvious how to generate data assuming the null hypothesis is true.

The question you need to answer is as follows: how can I randomly generate many paths of the time series with the same statistical properties as your observed data, except removing one particular property (whichever property you’re testing).

For anything to related to autocorrelations or seasonal effects, shuffling the data is appropriate because it removes any phenomena related to ordering, while preserving the moments of the distribution.

Testing regime shifts is simple – you just resample from the “old” distribution and see if it can explain the properties of the “new” distribution. For example, if you want to test whether post-GFC volatilities are different to pre-GFC volatilities, generating data under the null hypothesis is as easy as resampling from the pre-crisis return distribution, computing volatilities, and seeing how many paths generate have volatilities as high as the observed post-GFC volatility.

The key takeway from this post is that we only have access to one run of history. It is immensely difficult to figure out which events/anomalies are idiosyncratic to this run of history, vs “true” anomalies that exist in the actual data-generating process.

Distinguishing between the statistical artefacts and true anomalies is critically important because the former cannot be relied upon to reoccur in the future, so any strategy designed to capture them will look fantastic in backtests but fail in live trading (unfortunately a common occurrence in algo trading).

To summarise: embrace counterfactuals. Figure out as much as you can about alternative realities if you want to have a better idea of how you’re going to fare in this one.

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S.3.3 hypothesis testing examples.

• Example: Right-Tailed Test
• Example: Left-Tailed Test
• Example: Two-Tailed Test

Brinell Hardness Scores

An engineer measured the Brinell hardness of 25 pieces of ductile iron that were subcritically annealed. The resulting data were:

The engineer hypothesized that the mean Brinell hardness of all such ductile iron pieces is greater than 170. Therefore, he was interested in testing the hypotheses:

H 0 : μ = 170 H A : μ > 170

The engineer entered his data into Minitab and requested that the "one-sample t -test" be conducted for the above hypotheses. He obtained the following output:

Descriptive Statistics

$\mu$: mean of Brinelli

Null hypothesis    H₀: $\mu$ = 170 Alternative hypothesis    H₁: $\mu$ > 170

The output tells us that the average Brinell hardness of the n = 25 pieces of ductile iron was 172.52 with a standard deviation of 10.31. (The standard error of the mean "SE Mean", calculated by dividing the standard deviation 10.31 by the square root of n = 25, is 2.06). The test statistic t * is 1.22, and the P -value is 0.117.

If the engineer set his significance level α at 0.05 and used the critical value approach to conduct his hypothesis test, he would reject the null hypothesis if his test statistic t * were greater than 1.7109 (determined using statistical software or a t -table):

Since the engineer's test statistic, t * = 1.22, is not greater than 1.7109, the engineer fails to reject the null hypothesis. That is, the test statistic does not fall in the "critical region." There is insufficient evidence, at the \(\alpha\) = 0.05 level, to conclude that the mean Brinell hardness of all such ductile iron pieces is greater than 170.

If the engineer used the P -value approach to conduct his hypothesis test, he would determine the area under a t n - 1 = t 24 curve and to the right of the test statistic t * = 1.22:

In the output above, Minitab reports that the P -value is 0.117. Since the P -value, 0.117, is greater than \(\alpha\) = 0.05, the engineer fails to reject the null hypothesis. There is insufficient evidence, at the \(\alpha\) = 0.05 level, to conclude that the mean Brinell hardness of all such ductile iron pieces is greater than 170.

Note that the engineer obtains the same scientific conclusion regardless of the approach used. This will always be the case.

Height of Sunflowers

A biologist was interested in determining whether sunflower seedlings treated with an extract from Vinca minor roots resulted in a lower average height of sunflower seedlings than the standard height of 15.7 cm. The biologist treated a random sample of n = 33 seedlings with the extract and subsequently obtained the following heights:

The biologist's hypotheses are:

H 0 : μ = 15.7 H A : μ < 15.7

The biologist entered her data into Minitab and requested that the "one-sample t -test" be conducted for the above hypotheses. She obtained the following output:

$\mu$: mean of Height

Null hypothesis    H₀: $\mu$ = 15.7 Alternative hypothesis    H₁: $\mu$ < 15.7

The output tells us that the average height of the n = 33 sunflower seedlings was 13.664 with a standard deviation of 2.544. (The standard error of the mean "SE Mean", calculated by dividing the standard deviation 13.664 by the square root of n = 33, is 0.443). The test statistic t * is -4.60, and the P -value, 0.000, is to three decimal places.

Minitab Note. Minitab will always report P -values to only 3 decimal places. If Minitab reports the P -value as 0.000, it really means that the P -value is 0.000....something. Throughout this course (and your future research!), when you see that Minitab reports the P -value as 0.000, you should report the P -value as being "< 0.001."

If the biologist set her significance level \(\alpha\) at 0.05 and used the critical value approach to conduct her hypothesis test, she would reject the null hypothesis if her test statistic t * were less than -1.6939 (determined using statistical software or a t -table):s-3-3

Since the biologist's test statistic, t * = -4.60, is less than -1.6939, the biologist rejects the null hypothesis. That is, the test statistic falls in the "critical region." There is sufficient evidence, at the α = 0.05 level, to conclude that the mean height of all such sunflower seedlings is less than 15.7 cm.

If the biologist used the P -value approach to conduct her hypothesis test, she would determine the area under a t n - 1 = t 32 curve and to the left of the test statistic t * = -4.60:

In the output above, Minitab reports that the P -value is 0.000, which we take to mean < 0.001. Since the P -value is less than 0.001, it is clearly less than \(\alpha\) = 0.05, and the biologist rejects the null hypothesis. There is sufficient evidence, at the \(\alpha\) = 0.05 level, to conclude that the mean height of all such sunflower seedlings is less than 15.7 cm.

Note again that the biologist obtains the same scientific conclusion regardless of the approach used. This will always be the case.

Gum Thickness

A manufacturer claims that the thickness of the spearmint gum it produces is 7.5 one-hundredths of an inch. A quality control specialist regularly checks this claim. On one production run, he took a random sample of n = 10 pieces of gum and measured their thickness. He obtained:

The quality control specialist's hypotheses are:

H 0 : μ = 7.5 H A : μ ≠ 7.5

The quality control specialist entered his data into Minitab and requested that the "one-sample t -test" be conducted for the above hypotheses. He obtained the following output:

$\mu$: mean of Thickness

Null hypothesis    H₀: $\mu$ = 7.5 Alternative hypothesis    H₁: $\mu \ne$ 7.5

The output tells us that the average thickness of the n = 10 pieces of gums was 7.55 one-hundredths of an inch with a standard deviation of 0.1027. (The standard error of the mean "SE Mean", calculated by dividing the standard deviation 0.1027 by the square root of n = 10, is 0.0325). The test statistic t * is 1.54, and the P -value is 0.158.

If the quality control specialist sets his significance level \(\alpha\) at 0.05 and used the critical value approach to conduct his hypothesis test, he would reject the null hypothesis if his test statistic t * were less than -2.2616 or greater than 2.2616 (determined using statistical software or a t -table):

Since the quality control specialist's test statistic, t * = 1.54, is not less than -2.2616 nor greater than 2.2616, the quality control specialist fails to reject the null hypothesis. That is, the test statistic does not fall in the "critical region." There is insufficient evidence, at the \(\alpha\) = 0.05 level, to conclude that the mean thickness of all of the manufacturer's spearmint gum differs from 7.5 one-hundredths of an inch.

If the quality control specialist used the P -value approach to conduct his hypothesis test, he would determine the area under a t n - 1 = t 9 curve, to the right of 1.54 and to the left of -1.54:

In the output above, Minitab reports that the P -value is 0.158. Since the P -value, 0.158, is greater than \(\alpha\) = 0.05, the quality control specialist fails to reject the null hypothesis. There is insufficient evidence, at the \(\alpha\) = 0.05 level, to conclude that the mean thickness of all pieces of spearmint gum differs from 7.5 one-hundredths of an inch.

Note that the quality control specialist obtains the same scientific conclusion regardless of the approach used. This will always be the case.

In our review of hypothesis tests, we have focused on just one particular hypothesis test, namely that concerning the population mean \(\mu\). The important thing to recognize is that the topics discussed here — the general idea of hypothesis tests, errors in hypothesis testing, the critical value approach, and the P -value approach — generally extend to all of the hypothesis tests you will encounter.

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Hypothesis Testing - Explained

What is hypothesis testing.

Written by Jason Gordon

Updated at April 22nd, 2024

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In statistics, hypothesis testing is an action in which securities or financial analysts test an assumption or a prediction related to a population parameter. There is no set method for hypothesis testing, as the nature of the data used and the reason for such testing determines what methodology will be employed by the analyst. Hypothesis testing is basically utilized in concluding a hypothesis that is conducted on a given set of data derived from a larger population.

How does Hypothesis Testing Work? 

Analysts are faced with different hypotheses each and every day. While some of these hypotheses have some base to them, others dont, and this is why analysts prefer to test all hypotheses related to their field. In hypothesis testing, analysts review a statistical sample with the aim of proving or disproving the existence of a null hypothesis. A null hypothesis generally refers to a hypothesis that primarily holds no ground whatsoever but sounds quite rational. Simply put, hypothesis testing helps analysts to know whether an unproved statement is true or not. In a case where it is true, the analysts would employ the methods within such a hypothesis in his research on a larger population, otherwise, he would find alternatives till he gets something that holds base. Key Details

• Hypothesis testing is used to draw conclusions to the result of a hypothesis that is conducted on a sample data from a larger population
• This test informs the analyst on the validity of his hypothesis
• In the case of statistics, analysts test a hypothesis by calculating and analyzing a random group of samples of the population that is been researched.

Statistical Hypothesis: Testing Process

In statistics, hypothesis testing is conducted by an analysts by measuring random sample of the population that is being examined. To conduct such a test, all analysts are expected to make use of random populations to test two different types of hypotheses: firstly the null hypotheses and then the alternative alternative hypotheses. The null hypothesis sis the hypothesis which an analysts believes is valid. The alternative hypotheses is the one which the analyst believes to be untrue. However, there must be tests to show which one holds before they can reach any conclusion. There are also mutually exclusive events, thus if one hypothesis exists, the other wont, and vice-versa.

Examples of Hypothesis Testing

Let us assume that an analyst wants to test the probability of a getting a either a six, a five, or a four on a coin. In this case, his null hypothesis might be yes (that it is possible to get any of these numbers in the first roll), while the alternative hypothesis would be no (it is not possible to get any of these numbers in the first roll). In a case like this, the null hypothesis would hold if the first roll produces either a six, a five, or a four on the first throw. However, if a two, a three, or a one appears, then the alternative hypothesis would be said to be true. In mathematical representations, the null hypothesis would be given as Ho: P = 3/6 or 0.5. The alternative hypothesis would be depicted as Ha: P x= 3/6 or 0.5 since they both have equal chances and they are mutually exclusive. Here x= means not equal to 50%. 

Another Example  

Let us assume that 20 gamblers throw a dice using the details above. For clarity, we shall call a six, a five, and a four upper dice and a three, a two, and a one lower dice. Now, back to our example. Let us assume that 20 gamblers throw a dice 2 times each, and after the results have been counted, it is found that upper dice appeared 30% of the time, and lower dice appeared 70% of the time. In this case, the null hypothesis stated by the analyst above would be false and subsequently discarded because it is not equal to 50%. Here, the alternative hypothesis would be accepted. After this, the analyst would have to create another two sets of hypothesis, in which case the null hypothesis here would be the probability of getting up to 30% of upper dice, and the alternative hypothesis would be not getting up to 30% of upper dice.

Hypothesis Testing: The Four Steps Involved

There are four steps involved in hypothesis testing. The first step involves stating the null and alternative hypothesis. The second involves creating a plan for the evaluation of his hypotheses. The third step is the physical commencement of the analyzation of the sample data. And the final step is approving and disapproving the null hypothesis.

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Hypothesis Testing: A Comprehensive Guide to Scientific Decision-Making

In scientific research and experimentation, one needs a structured framework for answering questions, confirming results, and making decisions.

This framework, known as hypothesis testing , plays a pivotal role both in research and in various industries like healthcare, finance, and technology.

This guide will delve into the principles and processes of hypothesis testing, offering readers a holistic understanding of this fundamental aspect of scientific decision-making.

Definition of Hypothesis Testing

Hypothesis testing is a method used in statistics to decide whether a statement about a population parameter is likely to be true based on sample data.

The process involves making an initial assumption, observing data, then determining how compatible the data is with the assumption. It's a core part of many o nline certificate programs and widely used in fields requiring data analysis.

Importance of Hypothesis Testing in Research and Industry

The value of hypothesis testing goes beyond science and research. Businesses use it for making crucial decisions, such as whether a new product will succeed in the market, or if a change in strategy will lead to increased profit margins.

Similarly, in the healthcare sector, hypothesis testing helps determine if a new medication is more effective than the current standard treatment. This broad applicability underlies the significance of a problem-solving course that includes hypothesis testing.

Understanding the Basics of Hypothesis Testing

Before embarking on the journey of hypothesis testing, it's crucial to understand its fundamental elements - the Null and Alternate Hypotheses.

Explanation of Null Hypothesis

Definition Null Hypothesis

The Null Hypothesis, symbolized as H0, is a statement we test for possible rejection under the assumption that it is true. In most cases, it anticipates no effect, no difference, or no relationship between variables.

How to Formulate a Null Hypothesis

Formulating a null hypothesis requires identifying your research question, specifying your outcome variable, and expressing a statement of no effect or difference. For instance, you may hypothesize, "There is no significant difference between the performance of students who have breakfast and those who don't."

Practical Examples of Null Hypotheses

Consider a beverage company aiming to reduce its plastic use by 20% within a year. The null hypothesis might state that "There has been no decrease in the company's plastic use."

Explanation of Alternate Hypothesis

Definition Alternate Hypothesis

The alternative hypothesis, symbolized as H1, is the statement we accept when there's sufficient evidence against the null hypothesis. It anticipates an effect, a difference, or a relationship between variables.

How to Construct an Alternate Hypothesis

In constructing an alternate hypothesis, we simply state the counter of the null hypothesis. Following the above example, the alternate hypothesis would be, "There's a significant difference between the performance of students who have breakfast and those who don't."

Case Examples of Alternate Hypotheses

Referring to the beverage company example, the alternate hypothesis would state, "There has been a decrease in the company's plastic use."

Differentiating between Null and Alternate Hypotheses

While both form the crux of hypothesis testing, their roles differ significantly. The null hypothesis is the claim we test for possible rejection, while the alternate hypothesis is accepted when there's evidence against the null. However, neither proof nor disproof of either hypothesis is definitive since all statistical tests are susceptible to errors.

Understanding Errors in Hypothesis Testing

A critical aspect of hypothesis testing is the recognition and management of two types of errors: Type I and Type II errors. Understanding these errors is paramount for interpreting the results accurately and making informed decisions.

Type I Error: False Positive

A Type I error occurs when the null hypothesis is wrongly rejected when it is actually true. This is akin to a false alarm, where, for instance, a test indicates a drug is effective against a disease when it actually isn't. The probability of committing a Type I error is denoted by alpha (α), often set at 0.05 or 5%, indicating a 5% risk of rejecting the null hypothesis incorrectly.

Type II Error: False Negative

Conversely, a Type II error happens when the null hypothesis is not rejected when it is false. This can be compared to a missed detection, such as failing to identify the effectiveness of a beneficial drug. The probability of a Type II error is denoted by beta (β), and researchers strive to minimize this risk to ensure that genuine effects are detected.

Balancing the Risks: Power of the Test

The power of a statistical test is the probability that it correctly rejects a false null hypothesis, essentially avoiding a Type II error. High-powered tests are more reliable for detecting true effects. The power is influenced by the sample size, effect size, significance level, and variability within the data. Optimizing these factors can reduce the chances of both Type I and Type II errors, leading to more trustworthy conclusions.

Steps in Hypothesis Testing

Hypothesis testing involves a series of structured steps to guide researchers and professionals through the decision-making process:

Formulate Hypotheses : Clearly define the null and alternative hypotheses based on the research question or problem statement.

Choose a Significance Level (α) : Decide on the alpha level, which determines the threshold for rejecting the null hypothesis.

Select the Appropriate Test : Based on the data type and study design, choose a statistical test that aligns with the research objectives.

Collect and Analyze Data : Gather the necessary data and perform the statistical test to calculate the test statistic and p-value.

Make a Decision : Compare the p-value to the significance level. If the p-value is less than α, reject the null hypothesis in favor of the alternative. Otherwise, do not reject the null hypothesis.

Hypothesis testing is a cornerstone of scientific inquiry, providing a rigorous framework for evaluating theories, exploring relationships, and making decisions based on empirical evidence.

Whether in academia, healthcare, finance, or technology, the principles of hypothesis testing enable practitioners to draw conclusions with a defined level of confidence, navigate uncertainties, and contribute to advancements in their fields. By understanding its fundamentals, errors, and steps, professionals can apply hypothesis testing to enhance decision-making processes and achieve more reliable outcomes.

Through this exploration of hypothesis testing, it becomes clear that the method is not just a statistical tool but a comprehensive approach to answering complex questions across various domains. As researchers and industry professionals continue to harness its power, the potential for innovation and discovery remains boundless.

What is the fundamental concept and importance of hypothesis testing in scientific decision-making?

Understanding hypothesis testing.

Hypothesis testing is a cornerstone of scientific inquiry. It involves making an assumption, the hypothesis, about a population parameter. Scientists test these assumptions through experimentation and observation.

The Essence of Hypotheses

At its core, a hypothesis is a predictive statement. It usually pertains to an outcome or a relationship between variables. The hypothesis asserts a specific effect, direction, or magnitude will emerge under certain conditions.

Types of Hypotheses

There are two primary hypotheses in testing: null and alternative. The null hypothesis ( H0 ) suggests no effect or relationship exists. It represents a default position, waiting for evidence to challenge it. The alternative hypothesis ( H1 ) posits there is an effect or relationship. It states the specific condition the researcher believes is true.

Role of Evidence

Evidence plays a critical role. Researchers collect data through controlled methods. They aim to either support or refute the hypothesis. This data must be empirical and measurable, ensuring objectivity.

Decision-Making with P-Values

The p-value is a crucial concept in hypothesis testing. It is the probability of observing a test statistic as extreme as the one observed, given the null hypothesis is true. A low p-value indicates the observed data is unlikely under the null hypothesis. This typically leads to rejection of the null in favor of the alternative.

The Importance of Hypothesis Testing

Provides structure to research

Ensures consistency in methods

Allows quantification of evidence

Facilitates replication of studies

Shields from personal biases

Hypothesis testing helps map the unknown territory of scientific phenomena. It allows researchers to make informed decisions grounded in statistical evidence. This rational approach to understanding ensures that conclusions drawn from scientific work are reliable and valid.

The process also shapes the scientific method itself. It demands rigorous standards for evidence and reproducibility. Hypothesis testing thus builds a foundation on which scientific knowledge advances. It underpins the integrity of scientific disciplines. It challenges scientists to prove, disprove, and refine their understanding of the world.

Hypothesis testing is fundamental to the scientific decision-making process. It turns subjective questions into objective inquiries. It drives the pursuit of knowledge through empirical evidence. With hypothesis testing, science moves from conjecture to proven or disproven theories. It is this disciplined approach that adds credibility to scientific findings. Without it, distinguishing between chance results and true discoveries becomes impossible.

How do Type I and Type II errors relate to hypothesis testing and what are their implications on the results?

Understanding type i and type ii errors.

When delving into hypothesis testing, the concepts of Type I and Type II errors often emerge as critical elements. These errors play a paramount role in the interpretation of results. They convey the instances where our conclusions could be incorrect.

What Are Type I and Type II Errors?

Type I error occurs when we wrongly reject a true null hypothesis. We call this a false positive. It implies that the evidence suggests an effect or difference exists when it does not. In statistical terms, this is the 'alpha' (α), which defines the likelihood of a Type I error.

Type II error , in contrast, happens when we fail to reject a false null hypothesis. This error, termed a false negative, means that one overlooks an actual effect or difference. It's quantified by 'beta' (β), which gives the probability of a Type II error occurring.

Implications of Type I and Type II Errors

The implications of these errors reach far into hypothesis testing and the trustworthiness of results.

Confidence Levels : High risks of Type I errors lower confidence in findings. To mitigate this, researchers set a low alpha level, commonly 0.05. It shows a willingness to accept a 5% chance of a false positive.

Power of the Test : The risk of Type II errors correlates with the power of the test—the probability of correctly detecting an effect when it exists. A high beta value means a higher chance of missing an actual effect due to low test power.

Sample Size : Larger samples reduce both Type I and Type II error risks. They offer more accurate estimates and a clearer distinction between the null and alternative hypotheses.

Consequences : Type I errors might lead to unwarranted actions based on false positives. Type II errors could result in missed opportunities due to unrecognized truths.

Balancing Errors in Hypothesis Testing

Researchers must balance Type I and Type II errors in hypothesis testing. The balance depends on the context and potential consequences of each error.

Safety in Medicine : In drug testing, Type I errors can lead to harmful side effects if a drug isn't actually safe. Minimizing Type I errors is crucial here.

Effectiveness in Treatment : Conversely, Type II errors in medicine may miss a treatment effect. Ensuring sufficient power to detect treatment efficacy is essential.

Type I and Type II errors remind us of the limitations in hypothesis testing. No test is infallible. Decisions on alpha and beta levels depend on the stakes of potential errors.

Understanding and addressing these errors are vital. They enhance credibility in conclusions drawn from statistical testing. Proper balance ensures valuable and trustworthy research outcomes.

Can you explain the critical role of the p-value in hypothesis testing and its influence on accepting or rejecting the null hypothesis?

Understanding the p-value.

Researchers often turn to hypothesis testing to understand data. They make an initial assumption called the null hypothesis . This hypothesis suggests no effect or no difference exists. To challenge this, they use an alternative hypothesis.

The Null Hypothesis and P-value

In hypothesis testing, the p-value helps measure the strength of the results against the null hypothesis. It calculates the probability of observing data as extreme as the test results, assuming the null hypothesis is true. A low p-value indicates that the observed data would be very unlikely if the null hypothesis were true.

Significance Threshold

Scientists usually set a significance level before testing. Often, this level is 0.05 . It marks the cut-off for determining statistical significance.

If the p-value is below 0.05, the result is statistically significant.

This means the test provides enough evidence to reject the null hypothesis.

What Does Rejecting the Null Hypothesis Mean?

Rejecting the null does not prove the alternative hypothesis. It merely suggests that the data are not consistent with the null. Researchers can be more confident that an effect or difference might exist.

Misinterpretations of the P-value

A common mistake is seeing the p-value as the odds that the null hypothesis is true or false. It is not. It only assesses how compatible the data are with the null hypothesis.

Influencing Factors

Several factors influence the p-value. This includes the size of the effect and the sample size. Larger samples may detect smaller differences and result in smaller p-values.

The p-value is critical in deciding whether to accept or reject the null hypothesis. It quantifies how surprising the data are, assuming the null is true. A small p-value can lead to rejecting the null, paving the way for new scientific insights. However, it is crucial to use this tool wisely, with an understanding of its limitations and context.

He is a content producer who specializes in blog content. He has a master's degree in business administration and he lives in the Netherlands.

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What is Hypothesis Testing

• Test Statistic, Type I and type II Errors, and Significance Level
• Decision Rule in Hypothesis Testing
• p-Value in Hypothesis Testing
• Selecting the Appropriate Test Statistic
• Hypothesis Testing with t-statistic
• Hypothesis Testing with z-statistic
• Tests Concerning Differences in Means
• Paired Comparision Tests - Mean Differences When Populations are Not Independent
• Hypothesis Tests Concerning Variances
• Chi-square Test – Test for value of a single population variance
• F-test - Test for the Differences Between Two Population Variances
• Non-parametric Tests

Many a times, we want to test the validity of a statement. For example, is the mean return from this mutual fund more to the mean return from the benchmark? While answering such a question, our interest is not to find the actual mean returns of the mutual fund, but to test whether the statement holds true or not.

A hypothesis is a statement about one or more populations like the statement above.

A hypothesis testing is a standard procedure to test the hypothesis. There could be two possible results: 1) The hypothesis is correct and hence should be accepted. 2) The hypothesis is incorrect and should be rejected.

Steps in Hypothesis Testing

The hypothesis testing process consists of the following steps:

• Stating the hypotheses.
• Identifying the appropriate test statistic and its probability distribution.
• Specifying the significance level.
• Stating the decision rule.
• Collecting the data and calculating the test statistic.
• Making the statistical decision.

Null and Alternative Hypothesis

When we form a hypothesis to be tested, the hypothesis is called a null hypothesis. The null hypothesis is written as H0. A null hypothesis will be a simple statement about the population parameter. For example, the hypothesis that the mean returns of a mutual fund will be greater than or equal to 8% will be states as H0: m >= 8%.

The alternative hypothesis is the hypothesis accepted when the null hypothesis is rejected. It is represented as HA. In our example, the alternative hypothesis will be HA: m < 8%.

In general, a hypothesis can be formed as follows:

• H0: θ = θ0 versus HA: θ ≠ θ0
• H0: θ ≤ θ0 versus HA: θ > θ0
• H0: θ ≥ θ0 versus HA: θ < θ0

Where θ represents a population parameter and θ0 is a value assumed in the hypothesis.

One-tailed and Two-tailed Tests

A hypothesis test can be a one-tailed or a two-tailed test . A one-tailed test means that the hypothesis is one-sided such as the second and third formulation above. The second formulation tests whether the population parameter is greater than a certain value (one-sided). The third formulation tests whether the population parameter is greater than a certain value (again one-sided). The first formulation is two-sided; hence the hypothesis test will be twp-tailed. It tests for deviation of value on both sides of θ0.

We will use this example to illustrate the concepts related to hypothesis testing in the following pages.

A portfolio manager believes that the mean returns from a mutual fund are zero. He collects the returns data over the past 100 days and calculate the sample mean returns and the sample standard deviation as follow:

x-bar = 0.2%

Based on what we have learned till now, we can state the null and alternative hypothesis as follows:

H0: m = 0 versus HA: m ≠ 0

This is a two-tailed test. We will reject the null hypothesis if the mean is not equal to 0.

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• Hypothesis Testing: Definition, Uses, Limitations + Examples

Hypothesis testing is as old as the scientific method and is at the heart of the research process. 

Research exists to validate or disprove assumptions about various phenomena. The process of validation involves testing and it is in this context that we will explore hypothesis testing. 

What is a Hypothesis? 

A hypothesis is a calculated prediction or assumption about a population parameter based on limited evidence. The whole idea behind hypothesis formulation is testing—this means the researcher subjects his or her calculated assumption to a series of evaluations to know whether they are true or false. 

Typically, every research starts with a hypothesis—the investigator makes a claim and experiments to prove that this claim is true or false . For instance, if you predict that students who drink milk before class perform better than those who don’t, then this becomes a hypothesis that can be confirmed or refuted using an experiment.  

Read: What is Empirical Research Study? [Examples & Method]

What are the Types of Hypotheses? 

1. simple hypothesis.

Also known as a basic hypothesis, a simple hypothesis suggests that an independent variable is responsible for a corresponding dependent variable. In other words, an occurrence of the independent variable inevitably leads to an occurrence of the dependent variable. 

Typically, simple hypotheses are considered as generally true, and they establish a causal relationship between two variables. 

Examples of Simple Hypothesis  

• Drinking soda and other sugary drinks can cause obesity. 
• Smoking cigarettes daily leads to lung cancer.

2. Complex Hypothesis

A complex hypothesis is also known as a modal. It accounts for the causal relationship between two independent variables and the resulting dependent variables. This means that the combination of the independent variables leads to the occurrence of the dependent variables . 

Examples of Complex Hypotheses  

• Adults who do not smoke and drink are less likely to develop liver-related conditions.
• Global warming causes icebergs to melt which in turn causes major changes in weather patterns.

3. Null Hypothesis

As the name suggests, a null hypothesis is formed when a researcher suspects that there’s no relationship between the variables in an observation. In this case, the purpose of the research is to approve or disapprove this assumption. 

Examples of Null Hypothesis

• This is no significant change in a student’s performance if they drink coffee or tea before classes. 
• There’s no significant change in the growth of a plant if one uses distilled water only or vitamin-rich water. 

Read: Research Report: Definition, Types + [Writing Guide]

4. Alternative Hypothesis 

To disapprove a null hypothesis, the researcher has to come up with an opposite assumption—this assumption is known as the alternative hypothesis. This means if the null hypothesis says that A is false, the alternative hypothesis assumes that A is true. 

An alternative hypothesis can be directional or non-directional depending on the direction of the difference. A directional alternative hypothesis specifies the direction of the tested relationship, stating that one variable is predicted to be larger or smaller than the null value while a non-directional hypothesis only validates the existence of a difference without stating its direction. 

Examples of Alternative Hypotheses  

• Starting your day with a cup of tea instead of a cup of coffee can make you more alert in the morning. 
• The growth of a plant improves significantly when it receives distilled water instead of vitamin-rich water. 

5. Logical Hypothesis

Logical hypotheses are some of the most common types of calculated assumptions in systematic investigations. It is an attempt to use your reasoning to connect different pieces in research and build a theory using little evidence. In this case, the researcher uses any data available to him, to form a plausible assumption that can be tested. 

Examples of Logical Hypothesis

• Waking up early helps you to have a more productive day. 
• Beings from Mars would not be able to breathe the air in the atmosphere of the Earth. 

6. Empirical Hypothesis  

After forming a logical hypothesis, the next step is to create an empirical or working hypothesis. At this stage, your logical hypothesis undergoes systematic testing to prove or disprove the assumption. An empirical hypothesis is subject to several variables that can trigger changes and lead to specific outcomes. 

Examples of Empirical Testing 

• People who eat more fish run faster than people who eat meat.
• Women taking vitamin E grow hair faster than those taking vitamin K.

7. Statistical Hypothesis

When forming a statistical hypothesis, the researcher examines the portion of a population of interest and makes a calculated assumption based on the data from this sample. A statistical hypothesis is most common with systematic investigations involving a large target audience. Here, it’s impossible to collect responses from every member of the population so you have to depend on data from your sample and extrapolate the results to the wider population. 

Examples of Statistical Hypothesis  

• 45% of students in Louisiana have middle-income parents. 
• 80% of the UK’s population gets a divorce because of irreconcilable differences.

What is Hypothesis Testing? 

Hypothesis testing is an assessment method that allows researchers to determine the plausibility of a hypothesis. It involves testing an assumption about a specific population parameter to know whether it’s true or false. These population parameters include variance, standard deviation, and median. 

Typically, hypothesis testing starts with developing a null hypothesis and then performing several tests that support or reject the null hypothesis. The researcher uses test statistics to compare the association or relationship between two or more variables. 

Explore: Research Bias: Definition, Types + Examples

Researchers also use hypothesis testing to calculate the coefficient of variation and determine if the regression relationship and the correlation coefficient are statistically significant.

How Hypothesis Testing Works

The basis of hypothesis testing is to examine and analyze the null hypothesis and alternative hypothesis to know which one is the most plausible assumption. Since both assumptions are mutually exclusive, only one can be true. In other words, the occurrence of a null hypothesis destroys the chances of the alternative coming to life, and vice-versa. 

Interesting: 21 Chrome Extensions for Academic Researchers in 2021

What Are The Stages of Hypothesis Testing?  

To successfully confirm or refute an assumption, the researcher goes through five (5) stages of hypothesis testing; 

• Determine the null hypothesis
• Specify the alternative hypothesis
• Set the significance level
• Calculate the test statistics and corresponding P-value
• Draw your conclusion
• Determine the Null Hypothesis

Like we mentioned earlier, hypothesis testing starts with creating a null hypothesis which stands as an assumption that a certain statement is false or implausible. For example, the null hypothesis (H0) could suggest that different subgroups in the research population react to a variable in the same way. 

• Specify the Alternative Hypothesis

Once you know the variables for the null hypothesis, the next step is to determine the alternative hypothesis. The alternative hypothesis counters the null assumption by suggesting the statement or assertion is true. Depending on the purpose of your research, the alternative hypothesis can be one-sided or two-sided. 

Using the example we established earlier, the alternative hypothesis may argue that the different sub-groups react differently to the same variable based on several internal and external factors. 

• Set the Significance Level

Many researchers create a 5% allowance for accepting the value of an alternative hypothesis, even if the value is untrue. This means that there is a 0.05 chance that one would go with the value of the alternative hypothesis, despite the truth of the null hypothesis. 

Something to note here is that the smaller the significance level, the greater the burden of proof needed to reject the null hypothesis and support the alternative hypothesis.

Explore: What is Data Interpretation? + [Types, Method & Tools]

• Calculate the Test Statistics and Corresponding P-Value 

Test statistics in hypothesis testing allow you to compare different groups between variables while the p-value accounts for the probability of obtaining sample statistics if your null hypothesis is true. In this case, your test statistics can be the mean, median and similar parameters. 

If your p-value is 0.65, for example, then it means that the variable in your hypothesis will happen 65 in100 times by pure chance. Use this formula to determine the p-value for your data: 

• Draw Your Conclusions

After conducting a series of tests, you should be able to agree or refute the hypothesis based on feedback and insights from your sample data.  

Applications of Hypothesis Testing in Research

Hypothesis testing isn’t only confined to numbers and calculations; it also has several real-life applications in business, manufacturing, advertising, and medicine. 

In a factory or other manufacturing plants, hypothesis testing is an important part of quality and production control before the final products are approved and sent out to the consumer. 

During ideation and strategy development, C-level executives use hypothesis testing to evaluate their theories and assumptions before any form of implementation. For example, they could leverage hypothesis testing to determine whether or not some new advertising campaign, marketing technique, etc. causes increased sales. 

In addition, hypothesis testing is used during clinical trials to prove the efficacy of a drug or new medical method before its approval for widespread human usage. 

What is an Example of Hypothesis Testing?

An employer claims that her workers are of above-average intelligence. She takes a random sample of 20 of them and gets the following results: 

Mean IQ Scores: 110

Standard Deviation: 15 

Mean Population IQ: 100

Step 1: Using the value of the mean population IQ, we establish the null hypothesis as 100.

Step 2: State that the alternative hypothesis is greater than 100.

Step 3: State the alpha level as 0.05 or 5% 

Step 4: Find the rejection region area (given by your alpha level above) from the z-table. An area of .05 is equal to a z-score of 1.645.

Step 5: Calculate the test statistics using this formula

Z = (110–100) ÷ (15÷√20) 

10 ÷ 3.35 = 2.99 

If the value of the test statistics is higher than the value of the rejection region, then you should reject the null hypothesis. If it is less, then you cannot reject the null. 

In this case, 2.99 > 1.645 so we reject the null. 

Importance/Benefits of Hypothesis Testing 

The most significant benefit of hypothesis testing is it allows you to evaluate the strength of your claim or assumption before implementing it in your data set. Also, hypothesis testing is the only valid method to prove that something “is or is not”. Other benefits include: 

• Hypothesis testing provides a reliable framework for making any data decisions for your population of interest. 
• It helps the researcher to successfully extrapolate data from the sample to the larger population. 
• Hypothesis testing allows the researcher to determine whether the data from the sample is statistically significant. 
• Hypothesis testing is one of the most important processes for measuring the validity and reliability of outcomes in any systematic investigation. 
• It helps to provide links to the underlying theory and specific research questions.

Criticism and Limitations of Hypothesis Testing

Several limitations of hypothesis testing can affect the quality of data you get from this process. Some of these limitations include: 

• The interpretation of a p-value for observation depends on the stopping rule and definition of multiple comparisons. This makes it difficult to calculate since the stopping rule is subject to numerous interpretations, plus “multiple comparisons” are unavoidably ambiguous. 
• Conceptual issues often arise in hypothesis testing, especially if the researcher merges Fisher and Neyman-Pearson’s methods which are conceptually distinct. 
• In an attempt to focus on the statistical significance of the data, the researcher might ignore the estimation and confirmation by repeated experiments.
• Hypothesis testing can trigger publication bias, especially when it requires statistical significance as a criterion for publication.
• When used to detect whether a difference exists between groups, hypothesis testing can trigger absurd assumptions that affect the reliability of your observation.

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Table of Contents

In today’s data-driven world , decisions are based on data all the time. Hypothesis plays a crucial role in that process, whether it may be making business decisions, in the health sector, academia, or in quality improvement. Without hypothesis & hypothesis tests, you risk drawing the wrong conclusions and making bad decisions. In this tutorial, you will look at Hypothesis Testing in Statistics.

What Is Hypothesis Testing in Statistics?

Hypothesis Testing is a type of statistical analysis in which you put your assumptions about a population parameter to the test. It is used to estimate the relationship between 2 statistical variables.

Let's discuss few examples of statistical hypothesis from real-life - 

• A teacher assumes that 60% of his college's students come from lower-middle-class families.
• A doctor believes that 3D (Diet, Dose, and Discipline) is 90% effective for diabetic patients.

Now that you know about hypothesis testing, look at the two types of hypothesis testing in statistics.

Hypothesis Testing Formula

Z = ( x̅ – μ0 ) / (σ /√n)

• Here, x̅ is the sample mean,
• μ0 is the population mean,
• σ is the standard deviation,
• n is the sample size.

How Hypothesis Testing Works?

An analyst performs hypothesis testing on a statistical sample to present evidence of the plausibility of the null hypothesis. Measurements and analyses are conducted on a random sample of the population to test a theory. Analysts use a random population sample to test two hypotheses: the null and alternative hypotheses.

The null hypothesis is typically an equality hypothesis between population parameters; for example, a null hypothesis may claim that the population means return equals zero. The alternate hypothesis is essentially the inverse of the null hypothesis (e.g., the population means the return is not equal to zero). As a result, they are mutually exclusive, and only one can be correct. One of the two possibilities, however, will always be correct.

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Null Hypothesis and Alternate Hypothesis

The Null Hypothesis is the assumption that the event will not occur. A null hypothesis has no bearing on the study's outcome unless it is rejected.

H0 is the symbol for it, and it is pronounced H-naught.

The Alternate Hypothesis is the logical opposite of the null hypothesis. The acceptance of the alternative hypothesis follows the rejection of the null hypothesis. H1 is the symbol for it.

Let's understand this with an example.

A sanitizer manufacturer claims that its product kills 95 percent of germs on average. 

To put this company's claim to the test, create a null and alternate hypothesis.

H0 (Null Hypothesis): Average = 95%.

Alternative Hypothesis (H1): The average is less than 95%.

Another straightforward example to understand this concept is determining whether or not a coin is fair and balanced. The null hypothesis states that the probability of a show of heads is equal to the likelihood of a show of tails. In contrast, the alternate theory states that the probability of a show of heads and tails would be very different.

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Hypothesis Testing Calculation With Examples

Let's consider a hypothesis test for the average height of women in the United States. Suppose our null hypothesis is that the average height is 5'4". We gather a sample of 100 women and determine that their average height is 5'5". The standard deviation of population is 2.

To calculate the z-score, we would use the following formula:

z = ( x̅ – μ0 ) / (σ /√n)

z = (5'5" - 5'4") / (2" / √100)

z = 0.5 / (0.045)

 We will reject the null hypothesis as the z-score of 11.11 is very large and conclude that there is evidence to suggest that the average height of women in the US is greater than 5'4".

Steps of Hypothesis Testing

Step 1: specify your null and alternate hypotheses.

It is critical to rephrase your original research hypothesis (the prediction that you wish to study) as a null (Ho) and alternative (Ha) hypothesis so that you can test it quantitatively. Your first hypothesis, which predicts a link between variables, is generally your alternate hypothesis. The null hypothesis predicts no link between the variables of interest.

Step 2: Gather Data

For a statistical test to be legitimate, sampling and data collection must be done in a way that is meant to test your hypothesis. You cannot draw statistical conclusions about the population you are interested in if your data is not representative.

Step 3: Conduct a Statistical Test

Other statistical tests are available, but they all compare within-group variance (how to spread out the data inside a category) against between-group variance (how different the categories are from one another). If the between-group variation is big enough that there is little or no overlap between groups, your statistical test will display a low p-value to represent this. This suggests that the disparities between these groups are unlikely to have occurred by accident. Alternatively, if there is a large within-group variance and a low between-group variance, your statistical test will show a high p-value. Any difference you find across groups is most likely attributable to chance. The variety of variables and the level of measurement of your obtained data will influence your statistical test selection.

Step 4: Determine Rejection Of Your Null Hypothesis

Your statistical test results must determine whether your null hypothesis should be rejected or not. In most circumstances, you will base your judgment on the p-value provided by the statistical test. In most circumstances, your preset level of significance for rejecting the null hypothesis will be 0.05 - that is, when there is less than a 5% likelihood that these data would be seen if the null hypothesis were true. In other circumstances, researchers use a lower level of significance, such as 0.01 (1%). This reduces the possibility of wrongly rejecting the null hypothesis.

Step 5: Present Your Results 

The findings of hypothesis testing will be discussed in the results and discussion portions of your research paper, dissertation, or thesis. You should include a concise overview of the data and a summary of the findings of your statistical test in the results section. You can talk about whether your results confirmed your initial hypothesis or not in the conversation. Rejecting or failing to reject the null hypothesis is a formal term used in hypothesis testing. This is likely a must for your statistics assignments.

Types of Hypothesis Testing

To determine whether a discovery or relationship is statistically significant, hypothesis testing uses a z-test. It usually checks to see if two means are the same (the null hypothesis). Only when the population standard deviation is known and the sample size is 30 data points or more, can a z-test be applied.

A statistical test called a t-test is employed to compare the means of two groups. To determine whether two groups differ or if a procedure or treatment affects the population of interest, it is frequently used in hypothesis testing.

Chi-Square 

You utilize a Chi-square test for hypothesis testing concerning whether your data is as predicted. To determine if the expected and observed results are well-fitted, the Chi-square test analyzes the differences between categorical variables from a random sample. The test's fundamental premise is that the observed values in your data should be compared to the predicted values that would be present if the null hypothesis were true.

Hypothesis Testing and Confidence Intervals

Both confidence intervals and hypothesis tests are inferential techniques that depend on approximating the sample distribution. Data from a sample is used to estimate a population parameter using confidence intervals. Data from a sample is used in hypothesis testing to examine a given hypothesis. We must have a postulated parameter to conduct hypothesis testing.

Bootstrap distributions and randomization distributions are created using comparable simulation techniques. The observed sample statistic is the focal point of a bootstrap distribution, whereas the null hypothesis value is the focal point of a randomization distribution.

A variety of feasible population parameter estimates are included in confidence ranges. In this lesson, we created just two-tailed confidence intervals. There is a direct connection between these two-tail confidence intervals and these two-tail hypothesis tests. The results of a two-tailed hypothesis test and two-tailed confidence intervals typically provide the same results. In other words, a hypothesis test at the 0.05 level will virtually always fail to reject the null hypothesis if the 95% confidence interval contains the predicted value. A hypothesis test at the 0.05 level will nearly certainly reject the null hypothesis if the 95% confidence interval does not include the hypothesized parameter.

Simple and Composite Hypothesis Testing

Depending on the population distribution, you can classify the statistical hypothesis into two types.

Simple Hypothesis: A simple hypothesis specifies an exact value for the parameter.

Composite Hypothesis: A composite hypothesis specifies a range of values.

A company is claiming that their average sales for this quarter are 1000 units. This is an example of a simple hypothesis.

Suppose the company claims that the sales are in the range of 900 to 1000 units. Then this is a case of a composite hypothesis.

One-Tailed and Two-Tailed Hypothesis Testing

The One-Tailed test, also called a directional test, considers a critical region of data that would result in the null hypothesis being rejected if the test sample falls into it, inevitably meaning the acceptance of the alternate hypothesis.

In a one-tailed test, the critical distribution area is one-sided, meaning the test sample is either greater or lesser than a specific value.

In two tails, the test sample is checked to be greater or less than a range of values in a Two-Tailed test, implying that the critical distribution area is two-sided.

If the sample falls within this range, the alternate hypothesis will be accepted, and the null hypothesis will be rejected.

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Right Tailed Hypothesis Testing

If the larger than (>) sign appears in your hypothesis statement, you are using a right-tailed test, also known as an upper test. Or, to put it another way, the disparity is to the right. For instance, you can contrast the battery life before and after a change in production. Your hypothesis statements can be the following if you want to know if the battery life is longer than the original (let's say 90 hours):

• The null hypothesis is (H0 <= 90) or less change.
• A possibility is that battery life has risen (H1) > 90.

The crucial point in this situation is that the alternate hypothesis (H1), not the null hypothesis, decides whether you get a right-tailed test.

Left Tailed Hypothesis Testing

Alternative hypotheses that assert the true value of a parameter is lower than the null hypothesis are tested with a left-tailed test; they are indicated by the asterisk "<".

Suppose H0: mean = 50 and H1: mean not equal to 50

According to the H1, the mean can be greater than or less than 50. This is an example of a Two-tailed test.

In a similar manner, if H0: mean >=50, then H1: mean <50

Here the mean is less than 50. It is called a One-tailed test.

Type 1 and Type 2 Error

A hypothesis test can result in two types of errors.

Type 1 Error: A Type-I error occurs when sample results reject the null hypothesis despite being true.

Type 2 Error: A Type-II error occurs when the null hypothesis is not rejected when it is false, unlike a Type-I error.

Suppose a teacher evaluates the examination paper to decide whether a student passes or fails.

H0: Student has passed

H1: Student has failed

Type I error will be the teacher failing the student [rejects H0] although the student scored the passing marks [H0 was true]. 

Type II error will be the case where the teacher passes the student [do not reject H0] although the student did not score the passing marks [H1 is true].

Level of Significance

The alpha value is a criterion for determining whether a test statistic is statistically significant. In a statistical test, Alpha represents an acceptable probability of a Type I error. Because alpha is a probability, it can be anywhere between 0 and 1. In practice, the most commonly used alpha values are 0.01, 0.05, and 0.1, which represent a 1%, 5%, and 10% chance of a Type I error, respectively (i.e. rejecting the null hypothesis when it is in fact correct).

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A p-value is a metric that expresses the likelihood that an observed difference could have occurred by chance. As the p-value decreases the statistical significance of the observed difference increases. If the p-value is too low, you reject the null hypothesis.

Here you have taken an example in which you are trying to test whether the new advertising campaign has increased the product's sales. The p-value is the likelihood that the null hypothesis, which states that there is no change in the sales due to the new advertising campaign, is true. If the p-value is .30, then there is a 30% chance that there is no increase or decrease in the product's sales.  If the p-value is 0.03, then there is a 3% probability that there is no increase or decrease in the sales value due to the new advertising campaign. As you can see, the lower the p-value, the chances of the alternate hypothesis being true increases, which means that the new advertising campaign causes an increase or decrease in sales.

Why is Hypothesis Testing Important in Research Methodology?

Hypothesis testing is crucial in research methodology for several reasons:

• Provides evidence-based conclusions: It allows researchers to make objective conclusions based on empirical data, providing evidence to support or refute their research hypotheses.
• Supports decision-making: It helps make informed decisions, such as accepting or rejecting a new treatment, implementing policy changes, or adopting new practices.
• Adds rigor and validity: It adds scientific rigor to research using statistical methods to analyze data, ensuring that conclusions are based on sound statistical evidence.
• Contributes to the advancement of knowledge: By testing hypotheses, researchers contribute to the growth of knowledge in their respective fields by confirming existing theories or discovering new patterns and relationships.

Limitations of Hypothesis Testing

Hypothesis testing has some limitations that researchers should be aware of:

• It cannot prove or establish the truth: Hypothesis testing provides evidence to support or reject a hypothesis, but it cannot confirm the absolute truth of the research question.
• Results are sample-specific: Hypothesis testing is based on analyzing a sample from a population, and the conclusions drawn are specific to that particular sample.
• Possible errors: During hypothesis testing, there is a chance of committing type I error (rejecting a true null hypothesis) or type II error (failing to reject a false null hypothesis).
• Assumptions and requirements: Different tests have specific assumptions and requirements that must be met to accurately interpret results.

After reading this tutorial, you would have a much better understanding of hypothesis testing, one of the most important concepts in the field of Data Science . The majority of hypotheses are based on speculation about observed behavior, natural phenomena, or established theories.

If you are interested in statistics of data science and skills needed for such a career, you ought to explore Simplilearn’s Post Graduate Program in Data Science.

If you have any questions regarding this ‘Hypothesis Testing In Statistics’ tutorial, do share them in the comment section. Our subject matter expert will respond to your queries. Happy learning!

1. What is hypothesis testing in statistics with example?

Hypothesis testing is a statistical method used to determine if there is enough evidence in a sample data to draw conclusions about a population. It involves formulating two competing hypotheses, the null hypothesis (H0) and the alternative hypothesis (Ha), and then collecting data to assess the evidence. An example: testing if a new drug improves patient recovery (Ha) compared to the standard treatment (H0) based on collected patient data.

2. What is hypothesis testing and its types?

Hypothesis testing is a statistical method used to make inferences about a population based on sample data. It involves formulating two hypotheses: the null hypothesis (H0), which represents the default assumption, and the alternative hypothesis (Ha), which contradicts H0. The goal is to assess the evidence and determine whether there is enough statistical significance to reject the null hypothesis in favor of the alternative hypothesis.

Types of hypothesis testing:

• One-sample test: Used to compare a sample to a known value or a hypothesized value.
• Two-sample test: Compares two independent samples to assess if there is a significant difference between their means or distributions.
• Paired-sample test: Compares two related samples, such as pre-test and post-test data, to evaluate changes within the same subjects over time or under different conditions.
• Chi-square test: Used to analyze categorical data and determine if there is a significant association between variables.
• ANOVA (Analysis of Variance): Compares means across multiple groups to check if there is a significant difference between them.

3. What are the steps of hypothesis testing?

The steps of hypothesis testing are as follows:

• Formulate the hypotheses: State the null hypothesis (H0) and the alternative hypothesis (Ha) based on the research question.
• Set the significance level: Determine the acceptable level of error (alpha) for making a decision.
• Collect and analyze data: Gather and process the sample data.
• Compute test statistic: Calculate the appropriate statistical test to assess the evidence.
• Make a decision: Compare the test statistic with critical values or p-values and determine whether to reject H0 in favor of Ha or not.
• Draw conclusions: Interpret the results and communicate the findings in the context of the research question.

4. What are the 2 types of hypothesis testing?

• One-tailed (or one-sided) test: Tests for the significance of an effect in only one direction, either positive or negative.
• Two-tailed (or two-sided) test: Tests for the significance of an effect in both directions, allowing for the possibility of a positive or negative effect.

The choice between one-tailed and two-tailed tests depends on the specific research question and the directionality of the expected effect.

5. What are the 3 major types of hypothesis?

The three major types of hypotheses are:

• Null Hypothesis (H0): Represents the default assumption, stating that there is no significant effect or relationship in the data.
• Alternative Hypothesis (Ha): Contradicts the null hypothesis and proposes a specific effect or relationship that researchers want to investigate.
• Nondirectional Hypothesis: An alternative hypothesis that doesn't specify the direction of the effect, leaving it open for both positive and negative possibilities.

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About the author.

Avijeet is a Senior Research Analyst at Simplilearn. Passionate about Data Analytics, Machine Learning, and Deep Learning, Avijeet is also interested in politics, cricket, and football.

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9.E: Hypothesis Testing with One Sample (Exercises)

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These are homework exercises to accompany the Textmap created for "Introductory Statistics" by OpenStax.

9.1: Introduction

9.2: null and alternative hypotheses.

Some of the following statements refer to the null hypothesis, some to the alternate hypothesis.

State the null hypothesis, \(H_{0}\), and the alternative hypothesis. \(H_{a}\), in terms of the appropriate parameter \((\mu \text{or} p)\).

• The mean number of years Americans work before retiring is 34.
• At most 60% of Americans vote in presidential elections.
• The mean starting salary for San Jose State University graduates is at least $100,000 per year.
• Twenty-nine percent of high school seniors get drunk each month.
• Fewer than 5% of adults ride the bus to work in Los Angeles.
• The mean number of cars a person owns in her lifetime is not more than ten.
• About half of Americans prefer to live away from cities, given the choice.
• Europeans have a mean paid vacation each year of six weeks.
• The chance of developing breast cancer is under 11% for women.
• Private universities' mean tuition cost is more than $20,000 per year.
• \(H_{0}: \mu = 34; H_{a}: \mu \neq 34\)
• \(H_{0}: p \leq 0.60; H_{a}: p > 0.60\)
• \(H_{0}: \mu \geq 100,000; H_{a}: \mu < 100,000\)
• \(H_{0}: p = 0.29; H_{a}: p \neq 0.29\)
• \(H_{0}: p = 0.05; H_{a}: p < 0.05\)
• \(H_{0}: \mu \leq 10; H_{a}: \mu > 10\)
• \(H_{0}: p = 0.50; H_{a}: p \neq 0.50\)
• \(H_{0}: \mu = 6; H_{a}: \mu \neq 6\)
• \(H_{0}: p ≥ 0.11; H_{a}: p < 0.11\)
• \(H_{0}: \mu \leq 20,000; H_{a}: \mu > 20,000\)

Over the past few decades, public health officials have examined the link between weight concerns and teen girls' smoking. Researchers surveyed a group of 273 randomly selected teen girls living in Massachusetts (between 12 and 15 years old). After four years the girls were surveyed again. Sixty-three said they smoked to stay thin. Is there good evidence that more than thirty percent of the teen girls smoke to stay thin? The alternative hypothesis is:

• \(p < 0.30\)
• \(p \leq 0.30\)
• \(p \geq 0.30\)
• \(p > 0.30\)

A statistics instructor believes that fewer than 20% of Evergreen Valley College (EVC) students attended the opening night midnight showing of the latest Harry Potter movie. She surveys 84 of her students and finds that 11 attended the midnight showing. An appropriate alternative hypothesis is:

• \(p = 0.20\)
• \(p > 0.20\)
• \(p < 0.20\)
• \(p \leq 0.20\)

Previously, an organization reported that teenagers spent 4.5 hours per week, on average, on the phone. The organization thinks that, currently, the mean is higher. Fifteen randomly chosen teenagers were asked how many hours per week they spend on the phone. The sample mean was 4.75 hours with a sample standard deviation of 2.0. Conduct a hypothesis test. The null and alternative hypotheses are:

• \(H_{0}: \bar{x} = 4.5, H_{a}: \bar{x} > 4.5\)
• \(H_{0}: \mu \geq 4.5, H_{a}: \mu < 4.5\)
• \(H_{0}: \mu = 4.75, H_{a}: \mu > 4.75\)
• \(H_{0}: \mu = 4.5, H_{a}: \mu > 4.5\)

9.3: Outcomes and the Type I and Type II Errors

State the Type I and Type II errors in complete sentences given the following statements.

• The mean number of cars a person owns in his or her lifetime is not more than ten.
• Private universities mean tuition cost is more than $20,000 per year.
• Type I error: We conclude that the mean is not 34 years, when it really is 34 years. Type II error: We conclude that the mean is 34 years, when in fact it really is not 34 years.
• Type I error: We conclude that more than 60% of Americans vote in presidential elections, when the actual percentage is at most 60%.Type II error: We conclude that at most 60% of Americans vote in presidential elections when, in fact, more than 60% do.
• Type I error: We conclude that the mean starting salary is less than $100,000, when it really is at least $100,000. Type II error: We conclude that the mean starting salary is at least $100,000 when, in fact, it is less than $100,000.
• Type I error: We conclude that the proportion of high school seniors who get drunk each month is not 29%, when it really is 29%. Type II error: We conclude that the proportion of high school seniors who get drunk each month is 29% when, in fact, it is not 29%.
• Type I error: We conclude that fewer than 5% of adults ride the bus to work in Los Angeles, when the percentage that do is really 5% or more. Type II error: We conclude that 5% or more adults ride the bus to work in Los Angeles when, in fact, fewer that 5% do.
• Type I error: We conclude that the mean number of cars a person owns in his or her lifetime is more than 10, when in reality it is not more than 10. Type II error: We conclude that the mean number of cars a person owns in his or her lifetime is not more than 10 when, in fact, it is more than 10.
• Type I error: We conclude that the proportion of Americans who prefer to live away from cities is not about half, though the actual proportion is about half. Type II error: We conclude that the proportion of Americans who prefer to live away from cities is half when, in fact, it is not half.
• Type I error: We conclude that the duration of paid vacations each year for Europeans is not six weeks, when in fact it is six weeks. Type II error: We conclude that the duration of paid vacations each year for Europeans is six weeks when, in fact, it is not.
• Type I error: We conclude that the proportion is less than 11%, when it is really at least 11%. Type II error: We conclude that the proportion of women who develop breast cancer is at least 11%, when in fact it is less than 11%.
• Type I error: We conclude that the average tuition cost at private universities is more than $20,000, though in reality it is at most $20,000. Type II error: We conclude that the average tuition cost at private universities is at most $20,000 when, in fact, it is more than $20,000.

For statements a-j in Exercise 9.109 , answer the following in complete sentences.

• State a consequence of committing a Type I error.
• State a consequence of committing a Type II error.

When a new drug is created, the pharmaceutical company must subject it to testing before receiving the necessary permission from the Food and Drug Administration (FDA) to market the drug. Suppose the null hypothesis is “the drug is unsafe.” What is the Type II Error?

• To conclude the drug is safe when in, fact, it is unsafe.
• Not to conclude the drug is safe when, in fact, it is safe.
• To conclude the drug is safe when, in fact, it is safe.
• Not to conclude the drug is unsafe when, in fact, it is unsafe.

A statistics instructor believes that fewer than 20% of Evergreen Valley College (EVC) students attended the opening midnight showing of the latest Harry Potter movie. She surveys 84 of her students and finds that 11 of them attended the midnight showing. The Type I error is to conclude that the percent of EVC students who attended is ________.

• at least 20%, when in fact, it is less than 20%.
• 20%, when in fact, it is 20%.
• less than 20%, when in fact, it is at least 20%.
• less than 20%, when in fact, it is less than 20%.

It is believed that Lake Tahoe Community College (LTCC) Intermediate Algebra students get less than seven hours of sleep per night, on average. A survey of 22 LTCC Intermediate Algebra students generated a mean of 7.24 hours with a standard deviation of 1.93 hours. At a level of significance of 5%, do LTCC Intermediate Algebra students get less than seven hours of sleep per night, on average?

The Type II error is not to reject that the mean number of hours of sleep LTCC students get per night is at least seven when, in fact, the mean number of hours

• is more than seven hours.
• is at most seven hours.
• is at least seven hours.
• is less than seven hours.

Previously, an organization reported that teenagers spent 4.5 hours per week, on average, on the phone. The organization thinks that, currently, the mean is higher. Fifteen randomly chosen teenagers were asked how many hours per week they spend on the phone. The sample mean was 4.75 hours with a sample standard deviation of 2.0. Conduct a hypothesis test, the Type I error is:

• to conclude that the current mean hours per week is higher than 4.5, when in fact, it is higher
• to conclude that the current mean hours per week is higher than 4.5, when in fact, it is the same
• to conclude that the mean hours per week currently is 4.5, when in fact, it is higher
• to conclude that the mean hours per week currently is no higher than 4.5, when in fact, it is not higher

9.4: Distribution Needed for Hypothesis Testing

It is believed that Lake Tahoe Community College (LTCC) Intermediate Algebra students get less than seven hours of sleep per night, on average. A survey of 22 LTCC Intermediate Algebra students generated a mean of 7.24 hours with a standard deviation of 1.93 hours. At a level of significance of 5%, do LTCC Intermediate Algebra students get less than seven hours of sleep per night, on average? The distribution to be used for this test is \(\bar{X} \sim\) ________________

• \(N\left(7.24, \frac{1.93}{\sqrt{22}}\right)\)
• \(N\left(7.24, 1.93\right)\)

9.5: Rare Events, the Sample, Decision and Conclusion

The National Institute of Mental Health published an article stating that in any one-year period, approximately 9.5 percent of American adults suffer from depression or a depressive illness. Suppose that in a survey of 100 people in a certain town, seven of them suffered from depression or a depressive illness. Conduct a hypothesis test to determine if the true proportion of people in that town suffering from depression or a depressive illness is lower than the percent in the general adult American population.

• Is this a test of one mean or proportion?
• State the null and alternative hypotheses. \(H_{0}\) : ____________________ \(H_{a}\) : ____________________
• Is this a right-tailed, left-tailed, or two-tailed test?
• What symbol represents the random variable for this test?
• In words, define the random variable for this test.
• \(x =\) ________________
• \(n =\) ________________
• \(p′ =\) _____________
• Calculate \(\sigma_{x} =\) __________. Show the formula set-up.
• State the distribution to use for the hypothesis test.
• Find the \(p\text{-value}\).
• Reason for the decision:
• Conclusion (write out in a complete sentence):

9.6: Additional Information and Full Hypothesis Test Examples

For each of the word problems, use a solution sheet to do the hypothesis test. The solution sheet is found in [link] . Please feel free to make copies of the solution sheets. For the online version of the book, it is suggested that you copy the .doc or the .pdf files.

If you are using a Student's \(t\) - distribution for one of the following homework problems, you may assume that the underlying population is normally distributed. (In general, you must first prove that assumption, however.)

A particular brand of tires claims that its deluxe tire averages at least 50,000 miles before it needs to be replaced. From past studies of this tire, the standard deviation is known to be 8,000. A survey of owners of that tire design is conducted. From the 28 tires surveyed, the mean lifespan was 46,500 miles with a standard deviation of 9,800 miles. Using \(\alpha = 0.05\), is the data highly inconsistent with the claim?

• \(H_{0}: \mu \geq 50,000\)
• \(H_{a}: \mu < 50,000\)
• Let \(\bar{X} =\) the average lifespan of a brand of tires.
• normal distribution
• \(z = -2.315\)
• \(p\text{-value} = 0.0103\)
• Check student’s solution.
• alpha: 0.05
• Decision: Reject the null hypothesis.
• Reason for decision: The \(p\text{-value}\) is less than 0.05.
• Conclusion: There is sufficient evidence to conclude that the mean lifespan of the tires is less than 50,000 miles.
• \((43,537, 49,463)\)

From generation to generation, the mean age when smokers first start to smoke varies. However, the standard deviation of that age remains constant of around 2.1 years. A survey of 40 smokers of this generation was done to see if the mean starting age is at least 19. The sample mean was 18.1 with a sample standard deviation of 1.3. Do the data support the claim at the 5% level?

The cost of a daily newspaper varies from city to city. However, the variation among prices remains steady with a standard deviation of 20¢. A study was done to test the claim that the mean cost of a daily newspaper is $1.00. Twelve costs yield a mean cost of 95¢ with a standard deviation of 18¢. Do the data support the claim at the 1% level?

• \(H_{0}: \mu = $1.00\)
• \(H_{a}: \mu \neq $1.00\)
• Let \(\bar{X} =\) the average cost of a daily newspaper.
• \(z = –0.866\)
• \(p\text{-value} = 0.3865\)
• \(\alpha: 0.01\)
• Decision: Do not reject the null hypothesis.
• Reason for decision: The \(p\text{-value}\) is greater than 0.01.
• Conclusion: There is sufficient evidence to support the claim that the mean cost of daily papers is $1. The mean cost could be $1.
• \(($0.84, $1.06)\)

An article in the San Jose Mercury News stated that students in the California state university system take 4.5 years, on average, to finish their undergraduate degrees. Suppose you believe that the mean time is longer. You conduct a survey of 49 students and obtain a sample mean of 5.1 with a sample standard deviation of 1.2. Do the data support your claim at the 1% level?

The mean number of sick days an employee takes per year is believed to be about ten. Members of a personnel department do not believe this figure. They randomly survey eight employees. The number of sick days they took for the past year are as follows: 12; 4; 15; 3; 11; 8; 6; 8. Let \(x =\) the number of sick days they took for the past year. Should the personnel team believe that the mean number is ten?

• \(H_{0}: \mu = 10\)
• \(H_{a}: \mu \neq 10\)
• Let \(\bar{X}\) the mean number of sick days an employee takes per year.
• Student’s t -distribution
• \(t = –1.12\)
• \(p\text{-value} = 0.300\)
• \(\alpha: 0.05\)
• Reason for decision: The \(p\text{-value}\) is greater than 0.05.
• Conclusion: At the 5% significance level, there is insufficient evidence to conclude that the mean number of sick days is not ten.
• \((4.9443, 11.806)\)

In 1955, Life Magazine reported that the 25 year-old mother of three worked, on average, an 80 hour week. Recently, many groups have been studying whether or not the women's movement has, in fact, resulted in an increase in the average work week for women (combining employment and at-home work). Suppose a study was done to determine if the mean work week has increased. 81 women were surveyed with the following results. The sample mean was 83; the sample standard deviation was ten. Does it appear that the mean work week has increased for women at the 5% level?

Your statistics instructor claims that 60 percent of the students who take her Elementary Statistics class go through life feeling more enriched. For some reason that she can't quite figure out, most people don't believe her. You decide to check this out on your own. You randomly survey 64 of her past Elementary Statistics students and find that 34 feel more enriched as a result of her class. Now, what do you think?

• \(H_{0}: p \geq 0.6\)
• \(H_{a}: p < 0.6\)
• Let \(P′ =\) the proportion of students who feel more enriched as a result of taking Elementary Statistics.
• normal for a single proportion
• \(p\text{-value} = 0.1308\)
• Conclusion: There is insufficient evidence to conclude that less than 60 percent of her students feel more enriched.

The “plus-4s” confidence interval is \((0.411, 0.648)\)

A Nissan Motor Corporation advertisement read, “The average man’s I.Q. is 107. The average brown trout’s I.Q. is 4. So why can’t man catch brown trout?” Suppose you believe that the brown trout’s mean I.Q. is greater than four. You catch 12 brown trout. A fish psychologist determines the I.Q.s as follows: 5; 4; 7; 3; 6; 4; 5; 3; 6; 3; 8; 5. Conduct a hypothesis test of your belief.

Refer to Exercise 9.119 . Conduct a hypothesis test to see if your decision and conclusion would change if your belief were that the brown trout’s mean I.Q. is not four.

• \(H_{0}: \mu = 4\)
• \(H_{a}: \mu \neq 4\)
• Let \(\bar{X}\) the average I.Q. of a set of brown trout.
• two-tailed Student's t-test
• \(t = 1.95\)
• \(p\text{-value} = 0.076\)
• Reason for decision: The \(p\text{-value}\) is greater than 0.05
• Conclusion: There is insufficient evidence to conclude that the average IQ of brown trout is not four.
• \((3.8865,5.9468)\)

According to an article in Newsweek , the natural ratio of girls to boys is 100:105. In China, the birth ratio is 100: 114 (46.7% girls). Suppose you don’t believe the reported figures of the percent of girls born in China. You conduct a study. In this study, you count the number of girls and boys born in 150 randomly chosen recent births. There are 60 girls and 90 boys born of the 150. Based on your study, do you believe that the percent of girls born in China is 46.7?

A poll done for Newsweek found that 13% of Americans have seen or sensed the presence of an angel. A contingent doubts that the percent is really that high. It conducts its own survey. Out of 76 Americans surveyed, only two had seen or sensed the presence of an angel. As a result of the contingent’s survey, would you agree with the Newsweek poll? In complete sentences, also give three reasons why the two polls might give different results.

• \(H_{a}: p < 0.13\)
• Let \(P′ =\) the proportion of Americans who have seen or sensed angels
• –2.688
• \(p\text{-value} = 0.0036\)
• Reason for decision: The \(p\text{-value}\)e is less than 0.05.
• Conclusion: There is sufficient evidence to conclude that the percentage of Americans who have seen or sensed an angel is less than 13%.

The“plus-4s” confidence interval is (0.0022, 0.0978)

The mean work week for engineers in a start-up company is believed to be about 60 hours. A newly hired engineer hopes that it’s shorter. She asks ten engineering friends in start-ups for the lengths of their mean work weeks. Based on the results that follow, should she count on the mean work week to be shorter than 60 hours?

Data (length of mean work week): 70; 45; 55; 60; 65; 55; 55; 60; 50; 55.

Use the “Lap time” data for Lap 4 (see [link] ) to test the claim that Terri finishes Lap 4, on average, in less than 129 seconds. Use all twenty races given.

• \(H_{0}: \mu \geq 129\)
• \(H_{a}: \mu < 129\)
• Let \(\bar{X} =\) the average time in seconds that Terri finishes Lap 4.
• Student's t -distribution
• \(t = 1.209\)
• Conclusion: There is insufficient evidence to conclude that Terri’s mean lap time is less than 129 seconds.
• \((128.63, 130.37)\)

Use the “Initial Public Offering” data (see [link] ) to test the claim that the mean offer price was $18 per share. Do not use all the data. Use your random number generator to randomly survey 15 prices.

The following questions were written by past students. They are excellent problems!

"Asian Family Reunion," by Chau Nguyen

Every two years it comes around.

We all get together from different towns.

In my honest opinion,

It's not a typical family reunion.

Not forty, or fifty, or sixty,

But how about seventy companions!

The kids would play, scream, and shout

One minute they're happy, another they'll pout.

The teenagers would look, stare, and compare

From how they look to what they wear.

The men would chat about their business

That they make more, but never less.

Money is always their subject

And there's always talk of more new projects.

The women get tired from all of the chats

They head to the kitchen to set out the mats.

Some would sit and some would stand

Eating and talking with plates in their hands.

Then come the games and the songs

And suddenly, everyone gets along!

With all that laughter, it's sad to say

That it always ends in the same old way.

They hug and kiss and say "good-bye"

And then they all begin to cry!

I say that 60 percent shed their tears

But my mom counted 35 people this year.

She said that boys and men will always have their pride,

So we won't ever see them cry.

I myself don't think she's correct,

So could you please try this problem to see if you object?

• \(H_{0}: p = 0.60\)
• \(H_{a}: p < 0.60\)
• Let \(P′ =\) the proportion of family members who shed tears at a reunion.
• –1.71
• Reason for decision: \(p\text{-value} < \alpha\)
• Conclusion: At the 5% significance level, there is sufficient evidence to conclude that the proportion of family members who shed tears at a reunion is less than 0.60. However, the test is weak because the \(p\text{-value}\) and alpha are quite close, so other tests should be done.
• We are 95% confident that between 38.29% and 61.71% of family members will shed tears at a family reunion. \((0.3829, 0.6171)\). The“plus-4s” confidence interval (see chapter 8) is \((0.3861, 0.6139)\)

Note that here the “large-sample” \(1 - \text{PropZTest}\) provides the approximate \(p\text{-value}\) of 0.0438. Whenever a \(p\text{-value}\) based on a normal approximation is close to the level of significance, the exact \(p\text{-value}\) based on binomial probabilities should be calculated whenever possible. This is beyond the scope of this course.

"The Problem with Angels," by Cyndy Dowling

Although this problem is wholly mine,

The catalyst came from the magazine, Time.

On the magazine cover I did find

The realm of angels tickling my mind.

Inside, 69% I found to be

In angels, Americans do believe.

Then, it was time to rise to the task,

Ninety-five high school and college students I did ask.

Viewing all as one group,

Random sampling to get the scoop.

So, I asked each to be true,

"Do you believe in angels?" Tell me, do!

Hypothesizing at the start,

Totally believing in my heart

That the proportion who said yes

Would be equal on this test.

Lo and behold, seventy-three did arrive,

Out of the sample of ninety-five.

Now your job has just begun,

Solve this problem and have some fun.

"Blowing Bubbles," by Sondra Prull

Studying stats just made me tense,

I had to find some sane defense.

Some light and lifting simple play

To float my math anxiety away.

Blowing bubbles lifts me high

Takes my troubles to the sky.

POIK! They're gone, with all my stress

Bubble therapy is the best.

The label said each time I blew

The average number of bubbles would be at least 22.

I blew and blew and this I found

From 64 blows, they all are round!

But the number of bubbles in 64 blows

Varied widely, this I know.

20 per blow became the mean

They deviated by 6, and not 16.

From counting bubbles, I sure did relax

But now I give to you your task.

Was 22 a reasonable guess?

Find the answer and pass this test!

• \(H_{0}: \mu \geq 22\)
• \(H_{a}: \mu < 22\)
• Let \(\bar{X} =\) the mean number of bubbles per blow.
• –2.667
• \(p\text{-value} = 0.00486\)
• Conclusion: There is sufficient evidence to conclude that the mean number of bubbles per blow is less than 22.
• \((18.501, 21.499)\)

"Dalmatian Darnation," by Kathy Sparling

A greedy dog breeder named Spreckles

Bred puppies with numerous freckles

The Dalmatians he sought

Possessed spot upon spot

The more spots, he thought, the more shekels.

His competitors did not agree

That freckles would increase the fee.

They said, “Spots are quite nice

But they don't affect price;

One should breed for improved pedigree.”

The breeders decided to prove

This strategy was a wrong move.

Breeding only for spots

Would wreak havoc, they thought.

His theory they want to disprove.

They proposed a contest to Spreckles

Comparing dog prices to freckles.

In records they looked up

One hundred one pups:

Dalmatians that fetched the most shekels.

They asked Mr. Spreckles to name

An average spot count he'd claim

To bring in big bucks.

Said Spreckles, “Well, shucks,

It's for one hundred one that I aim.”

Said an amateur statistician

Who wanted to help with this mission.

“Twenty-one for the sample

Standard deviation's ample:

They examined one hundred and one

Dalmatians that fetched a good sum.

They counted each spot,

Mark, freckle and dot

And tallied up every one.

Instead of one hundred one spots

They averaged ninety six dots

Can they muzzle Spreckles’

Obsession with freckles

Based on all the dog data they've got?

"Macaroni and Cheese, please!!" by Nedda Misherghi and Rachelle Hall

As a poor starving student I don't have much money to spend for even the bare necessities. So my favorite and main staple food is macaroni and cheese. It's high in taste and low in cost and nutritional value.

One day, as I sat down to determine the meaning of life, I got a serious craving for this, oh, so important, food of my life. So I went down the street to Greatway to get a box of macaroni and cheese, but it was SO expensive! $2.02 !!! Can you believe it? It made me stop and think. The world is changing fast. I had thought that the mean cost of a box (the normal size, not some super-gigantic-family-value-pack) was at most $1, but now I wasn't so sure. However, I was determined to find out. I went to 53 of the closest grocery stores and surveyed the prices of macaroni and cheese. Here are the data I wrote in my notebook:

Price per box of Mac and Cheese:

• 5 stores @ $2.02
• 15 stores @ $0.25
• 3 stores @ $1.29
• 6 stores @ $0.35
• 4 stores @ $2.27
• 7 stores @ $1.50
• 5 stores @ $1.89
• 8 stores @ 0.75.

I could see that the cost varied but I had to sit down to figure out whether or not I was right. If it does turn out that this mouth-watering dish is at most $1, then I'll throw a big cheesy party in our next statistics lab, with enough macaroni and cheese for just me. (After all, as a poor starving student I can't be expected to feed our class of animals!)

• \(H_{0}: \mu \leq 1\)
• \(H_{a}: \mu > 1\)
• Let \(\bar{X} =\) the mean cost in dollars of macaroni and cheese in a certain town.
• Student's \(t\)-distribution
• \(t = 0.340\)
• \(p\text{-value} = 0.36756\)
• Conclusion: The mean cost could be $1, or less. At the 5% significance level, there is insufficient evidence to conclude that the mean price of a box of macaroni and cheese is more than $1.
• \((0.8291, 1.241)\)

"William Shakespeare: The Tragedy of Hamlet, Prince of Denmark," by Jacqueline Ghodsi

THE CHARACTERS (in order of appearance):

• HAMLET, Prince of Denmark and student of Statistics
• POLONIUS, Hamlet’s tutor
• HOROTIO, friend to Hamlet and fellow student

Scene: The great library of the castle, in which Hamlet does his lessons

(The day is fair, but the face of Hamlet is clouded. He paces the large room. His tutor, Polonius, is reprimanding Hamlet regarding the latter’s recent experience. Horatio is seated at the large table at right stage.)

POLONIUS: My Lord, how cans’t thou admit that thou hast seen a ghost! It is but a figment of your imagination!

HAMLET: I beg to differ; I know of a certainty that five-and-seventy in one hundred of us, condemned to the whips and scorns of time as we are, have gazed upon a spirit of health, or goblin damn’d, be their intents wicked or charitable.

POLONIUS If thou doest insist upon thy wretched vision then let me invest your time; be true to thy work and speak to me through the reason of the null and alternate hypotheses. (He turns to Horatio.) Did not Hamlet himself say, “What piece of work is man, how noble in reason, how infinite in faculties? Then let not this foolishness persist. Go, Horatio, make a survey of three-and-sixty and discover what the true proportion be. For my part, I will never succumb to this fantasy, but deem man to be devoid of all reason should thy proposal of at least five-and-seventy in one hundred hold true.

HORATIO (to Hamlet): What should we do, my Lord?

HAMLET: Go to thy purpose, Horatio.

HORATIO: To what end, my Lord?

HAMLET: That you must teach me. But let me conjure you by the rights of our fellowship, by the consonance of our youth, but the obligation of our ever-preserved love, be even and direct with me, whether I am right or no.

(Horatio exits, followed by Polonius, leaving Hamlet to ponder alone.)

(The next day, Hamlet awaits anxiously the presence of his friend, Horatio. Polonius enters and places some books upon the table just a moment before Horatio enters.)

POLONIUS: So, Horatio, what is it thou didst reveal through thy deliberations?

HORATIO: In a random survey, for which purpose thou thyself sent me forth, I did discover that one-and-forty believe fervently that the spirits of the dead walk with us. Before my God, I might not this believe, without the sensible and true avouch of mine own eyes.

POLONIUS: Give thine own thoughts no tongue, Horatio. (Polonius turns to Hamlet.) But look to’t I charge you, my Lord. Come Horatio, let us go together, for this is not our test. (Horatio and Polonius leave together.)

HAMLET: To reject, or not reject, that is the question: whether ‘tis nobler in the mind to suffer the slings and arrows of outrageous statistics, or to take arms against a sea of data, and, by opposing, end them. (Hamlet resignedly attends to his task.)

(Curtain falls)

"Untitled," by Stephen Chen

I've often wondered how software is released and sold to the public. Ironically, I work for a company that sells products with known problems. Unfortunately, most of the problems are difficult to create, which makes them difficult to fix. I usually use the test program X, which tests the product, to try to create a specific problem. When the test program is run to make an error occur, the likelihood of generating an error is 1%.

So, armed with this knowledge, I wrote a new test program Y that will generate the same error that test program X creates, but more often. To find out if my test program is better than the original, so that I can convince the management that I'm right, I ran my test program to find out how often I can generate the same error. When I ran my test program 50 times, I generated the error twice. While this may not seem much better, I think that I can convince the management to use my test program instead of the original test program. Am I right?

• \(H_{0}: p = 0.01\)
• \(H_{a}: p > 0.01\)
• Let \(P′ =\) the proportion of errors generated
• Normal for a single proportion
• Decision: Reject the null hypothesis
• Conclusion: At the 5% significance level, there is sufficient evidence to conclude that the proportion of errors generated is more than 0.01.

The“plus-4s” confidence interval is \((0.004, 0.144)\).

"Japanese Girls’ Names"

by Kumi Furuichi

It used to be very typical for Japanese girls’ names to end with “ko.” (The trend might have started around my grandmothers’ generation and its peak might have been around my mother’s generation.) “Ko” means “child” in Chinese characters. Parents would name their daughters with “ko” attaching to other Chinese characters which have meanings that they want their daughters to become, such as Sachiko—happy child, Yoshiko—a good child, Yasuko—a healthy child, and so on.

However, I noticed recently that only two out of nine of my Japanese girlfriends at this school have names which end with “ko.” More and more, parents seem to have become creative, modernized, and, sometimes, westernized in naming their children.

I have a feeling that, while 70 percent or more of my mother’s generation would have names with “ko” at the end, the proportion has dropped among my peers. I wrote down all my Japanese friends’, ex-classmates’, co-workers, and acquaintances’ names that I could remember. Following are the names. (Some are repeats.) Test to see if the proportion has dropped for this generation.

Ai, Akemi, Akiko, Ayumi, Chiaki, Chie, Eiko, Eri, Eriko, Fumiko, Harumi, Hitomi, Hiroko, Hiroko, Hidemi, Hisako, Hinako, Izumi, Izumi, Junko, Junko, Kana, Kanako, Kanayo, Kayo, Kayoko, Kazumi, Keiko, Keiko, Kei, Kumi, Kumiko, Kyoko, Kyoko, Madoka, Maho, Mai, Maiko, Maki, Miki, Miki, Mikiko, Mina, Minako, Miyako, Momoko, Nana, Naoko, Naoko, Naoko, Noriko, Rieko, Rika, Rika, Rumiko, Rei, Reiko, Reiko, Sachiko, Sachiko, Sachiyo, Saki, Sayaka, Sayoko, Sayuri, Seiko, Shiho, Shizuka, Sumiko, Takako, Takako, Tomoe, Tomoe, Tomoko, Touko, Yasuko, Yasuko, Yasuyo, Yoko, Yoko, Yoko, Yoshiko, Yoshiko, Yoshiko, Yuka, Yuki, Yuki, Yukiko, Yuko, Yuko.

"Phillip’s Wish," by Suzanne Osorio

My nephew likes to play

Chasing the girls makes his day.

He asked his mother

If it is okay

To get his ear pierced.

She said, “No way!”

To poke a hole through your ear,

Is not what I want for you, dear.

He argued his point quite well,

Says even my macho pal, Mel,

Has gotten this done.

It’s all just for fun.

C’mon please, mom, please, what the hell.

Again Phillip complained to his mother,

Saying half his friends (including their brothers)

Are piercing their ears

And they have no fears

He wants to be like the others.

She said, “I think it’s much less.

We must do a hypothesis test.

And if you are right,

I won’t put up a fight.

But, if not, then my case will rest.”

We proceeded to call fifty guys

To see whose prediction would fly.

Nineteen of the fifty

Said piercing was nifty

And earrings they’d occasionally buy.

Then there’s the other thirty-one,

Who said they’d never have this done.

So now this poem’s finished.

Will his hopes be diminished,

Or will my nephew have his fun?

• \(H_{0}: p = 0.50\)
• \(H_{a}: p < 0.50\)
• Let \(P′ =\) the proportion of friends that has a pierced ear.
• –1.70
• \(p\text{-value} = 0.0448\)
• Reason for decision: The \(p\text{-value}\) is less than 0.05. (However, they are very close.)
• Conclusion: There is sufficient evidence to support the claim that less than 50% of his friends have pierced ears.
• Confidence Interval: \((0.245, 0.515)\): The “plus-4s” confidence interval is \((0.259, 0.519)\).

"The Craven," by Mark Salangsang

Once upon a morning dreary

In stats class I was weak and weary.

Pondering over last night’s homework

Whose answers were now on the board

This I did and nothing more.

While I nodded nearly napping

Suddenly, there came a tapping.

As someone gently rapping,

Rapping my head as I snore.

Quoth the teacher, “Sleep no more.”

“In every class you fall asleep,”

The teacher said, his voice was deep.

“So a tally I’ve begun to keep

Of every class you nap and snore.

The percentage being forty-four.”

“My dear teacher I must confess,

While sleeping is what I do best.

The percentage, I think, must be less,

A percentage less than forty-four.”

This I said and nothing more.

“We’ll see,” he said and walked away,

And fifty classes from that day

He counted till the month of May

The classes in which I napped and snored.

The number he found was twenty-four.

At a significance level of 0.05,

Please tell me am I still alive?

Or did my grade just take a dive

Plunging down beneath the floor?

Upon thee I hereby implore.

Toastmasters International cites a report by Gallop Poll that 40% of Americans fear public speaking. A student believes that less than 40% of students at her school fear public speaking. She randomly surveys 361 schoolmates and finds that 135 report they fear public speaking. Conduct a hypothesis test to determine if the percent at her school is less than 40%.

• \(H_{0}: p = 0.40\)
• \(H_{a}: p < 0.40\)
• Let \(P′ =\) the proportion of schoolmates who fear public speaking.
• –1.01
• \(p\text{-value} = 0.1563\)
• Conclusion: There is insufficient evidence to support the claim that less than 40% of students at the school fear public speaking.
• Confidence Interval: \((0.3241, 0.4240)\): The “plus-4s” confidence interval is \((0.3257, 0.4250)\).

Sixty-eight percent of online courses taught at community colleges nationwide were taught by full-time faculty. To test if 68% also represents California’s percent for full-time faculty teaching the online classes, Long Beach City College (LBCC) in California, was randomly selected for comparison. In the same year, 34 of the 44 online courses LBCC offered were taught by full-time faculty. Conduct a hypothesis test to determine if 68% represents California. NOTE: For more accurate results, use more California community colleges and this past year's data.

According to an article in Bloomberg Businessweek , New York City's most recent adult smoking rate is 14%. Suppose that a survey is conducted to determine this year’s rate. Nine out of 70 randomly chosen N.Y. City residents reply that they smoke. Conduct a hypothesis test to determine if the rate is still 14% or if it has decreased.

• \(H_{0}: p = 0.14\)
• \(H_{a}: p < 0.14\)
• Let \(P′ =\) the proportion of NYC residents that smoke.
• –0.2756
• \(p\text{-value} = 0.3914\)
• At the 5% significance level, there is insufficient evidence to conclude that the proportion of NYC residents who smoke is less than 0.14.
• Confidence Interval: \((0.0502, 0.2070)\): The “plus-4s” confidence interval (see chapter 8) is \((0.0676, 0.2297)\).

The mean age of De Anza College students in a previous term was 26.6 years old. An instructor thinks the mean age for online students is older than 26.6. She randomly surveys 56 online students and finds that the sample mean is 29.4 with a standard deviation of 2.1. Conduct a hypothesis test.

Registered nurses earned an average annual salary of $69,110. For that same year, a survey was conducted of 41 California registered nurses to determine if the annual salary is higher than $69,110 for California nurses. The sample average was $71,121 with a sample standard deviation of $7,489. Conduct a hypothesis test.

• \(H_{0}: \mu = 69,110\)
• \(H_{0}: \mu > 69,110\)
• Let \(\bar{X} =\) the mean salary in dollars for California registered nurses.
• \(t = 1.719\)
• \(p\text{-value}: 0.0466\)
• Conclusion: At the 5% significance level, there is sufficient evidence to conclude that the mean salary of California registered nurses exceeds $69,110.
• \(($68,757, $73,485)\)

La Leche League International reports that the mean age of weaning a child from breastfeeding is age four to five worldwide. In America, most nursing mothers wean their children much earlier. Suppose a random survey is conducted of 21 U.S. mothers who recently weaned their children. The mean weaning age was nine months (3/4 year) with a standard deviation of 4 months. Conduct a hypothesis test to determine if the mean weaning age in the U.S. is less than four years old.

Over the past few decades, public health officials have examined the link between weight concerns and teen girls' smoking. Researchers surveyed a group of 273 randomly selected teen girls living in Massachusetts (between 12 and 15 years old). After four years the girls were surveyed again. Sixty-three said they smoked to stay thin. Is there good evidence that more than thirty percent of the teen girls smoke to stay thin?

After conducting the test, your decision and conclusion are

• Reject \(H_{0}\): There is sufficient evidence to conclude that more than 30% of teen girls smoke to stay thin.
• Do not reject \(H_{0}\): There is not sufficient evidence to conclude that less than 30% of teen girls smoke to stay thin.
• Do not reject \(H_{0}\): There is not sufficient evidence to conclude that more than 30% of teen girls smoke to stay thin.
• Reject \(H_{0}\): There is sufficient evidence to conclude that less than 30% of teen girls smoke to stay thin.

A statistics instructor believes that fewer than 20% of Evergreen Valley College (EVC) students attended the opening night midnight showing of the latest Harry Potter movie. She surveys 84 of her students and finds that 11 of them attended the midnight showing.

At a 1% level of significance, an appropriate conclusion is:

• There is insufficient evidence to conclude that the percent of EVC students who attended the midnight showing of Harry Potter is less than 20%.
• There is sufficient evidence to conclude that the percent of EVC students who attended the midnight showing of Harry Potter is more than 20%.
• There is sufficient evidence to conclude that the percent of EVC students who attended the midnight showing of Harry Potter is less than 20%.
• There is insufficient evidence to conclude that the percent of EVC students who attended the midnight showing of Harry Potter is at least 20%.

Previously, an organization reported that teenagers spent 4.5 hours per week, on average, on the phone. The organization thinks that, currently, the mean is higher. Fifteen randomly chosen teenagers were asked how many hours per week they spend on the phone. The sample mean was 4.75 hours with a sample standard deviation of 2.0. Conduct a hypothesis test.

At a significance level of \(a = 0.05\), what is the correct conclusion?

• There is enough evidence to conclude that the mean number of hours is more than 4.75
• There is enough evidence to conclude that the mean number of hours is more than 4.5
• There is not enough evidence to conclude that the mean number of hours is more than 4.5
• There is not enough evidence to conclude that the mean number of hours is more than 4.75

Instructions: For the following ten exercises,

Hypothesis testing: For the following ten exercises, answer each question.

State the null and alternate hypothesis.

State the \(p\text{-value}\).

State \(\alpha\).

What is your decision?

Write a conclusion.

Answer any other questions asked in the problem.

According to the Center for Disease Control website, in 2011 at least 18% of high school students have smoked a cigarette. An Introduction to Statistics class in Davies County, KY conducted a hypothesis test at the local high school (a medium sized–approximately 1,200 students–small city demographic) to determine if the local high school’s percentage was lower. One hundred fifty students were chosen at random and surveyed. Of the 150 students surveyed, 82 have smoked. Use a significance level of 0.05 and using appropriate statistical evidence, conduct a hypothesis test and state the conclusions.

A recent survey in the N.Y. Times Almanac indicated that 48.8% of families own stock. A broker wanted to determine if this survey could be valid. He surveyed a random sample of 250 families and found that 142 owned some type of stock. At the 0.05 significance level, can the survey be considered to be accurate?

• \(H_{0}: p = 0.488\) \(H_{a}: p \neq 0.488\)
• \(p\text{-value} = 0.0114\)
• \(\alpha = 0.05\)
• Reject the null hypothesis.
• At the 5% level of significance, there is enough evidence to conclude that 48.8% of families own stocks.
• The survey does not appear to be accurate.

Driver error can be listed as the cause of approximately 54% of all fatal auto accidents, according to the American Automobile Association. Thirty randomly selected fatal accidents are examined, and it is determined that 14 were caused by driver error. Using \(\alpha = 0.05\), is the AAA proportion accurate?

The US Department of Energy reported that 51.7% of homes were heated by natural gas. A random sample of 221 homes in Kentucky found that 115 were heated by natural gas. Does the evidence support the claim for Kentucky at the \(\alpha = 0.05\) level in Kentucky? Are the results applicable across the country? Why?

• \(H_{0}: p = 0.517\) \(H_{0}: p \neq 0.517\)
• \(p\text{-value} = 0.9203\).
• \(\alpha = 0.05\).
• Do not reject the null hypothesis.
• At the 5% significance level, there is not enough evidence to conclude that the proportion of homes in Kentucky that are heated by natural gas is 0.517.
• However, we cannot generalize this result to the entire nation. First, the sample’s population is only the state of Kentucky. Second, it is reasonable to assume that homes in the extreme north and south will have extreme high usage and low usage, respectively. We would need to expand our sample base to include these possibilities if we wanted to generalize this claim to the entire nation.

For Americans using library services, the American Library Association claims that at most 67% of patrons borrow books. The library director in Owensboro, Kentucky feels this is not true, so she asked a local college statistic class to conduct a survey. The class randomly selected 100 patrons and found that 82 borrowed books. Did the class demonstrate that the percentage was higher in Owensboro, KY? Use \(\alpha = 0.01\) level of significance. What is the possible proportion of patrons that do borrow books from the Owensboro Library?

The Weather Underground reported that the mean amount of summer rainfall for the northeastern US is at least 11.52 inches. Ten cities in the northeast are randomly selected and the mean rainfall amount is calculated to be 7.42 inches with a standard deviation of 1.3 inches. At the \(\alpha = 0.05 level\), can it be concluded that the mean rainfall was below the reported average? What if \(\alpha = 0.01\)? Assume the amount of summer rainfall follows a normal distribution.

• \(H_{0}: \mu \geq 11.52\) \(H_{a}: \mu < 11.52\)
• \(p\text{-value} = 0.000002\) which is almost 0.
• At the 5% significance level, there is enough evidence to conclude that the mean amount of summer rain in the northeaster US is less than 11.52 inches, on average.
• We would make the same conclusion if alpha was 1% because the \(p\text{-value}\) is almost 0.

A survey in the N.Y. Times Almanac finds the mean commute time (one way) is 25.4 minutes for the 15 largest US cities. The Austin, TX chamber of commerce feels that Austin’s commute time is less and wants to publicize this fact. The mean for 25 randomly selected commuters is 22.1 minutes with a standard deviation of 5.3 minutes. At the \(\alpha = 0.10\) level, is the Austin, TX commute significantly less than the mean commute time for the 15 largest US cities?

A report by the Gallup Poll found that a woman visits her doctor, on average, at most 5.8 times each year. A random sample of 20 women results in these yearly visit totals

3; 2; 1; 3; 7; 2; 9; 4; 6; 6; 8; 0; 5; 6; 4; 2; 1; 3; 4; 1

At the \(\alpha = 0.05\) level can it be concluded that the sample mean is higher than 5.8 visits per year?

• \(H_{0}: \mu \leq 5.8\) \(H_{a}: \mu > 5.8\)
• \(p\text{-value} = 0.9987\)
• At the 5% level of significance, there is not enough evidence to conclude that a woman visits her doctor, on average, more than 5.8 times a year.

According to the N.Y. Times Almanac the mean family size in the U.S. is 3.18. A sample of a college math class resulted in the following family sizes:

5; 4; 5; 4; 4; 3; 6; 4; 3; 3; 5; 5; 6; 3; 3; 2; 7; 4; 5; 2; 2; 2; 3; 2

At \(\alpha = 0.05\) level, is the class’ mean family size greater than the national average? Does the Almanac result remain valid? Why?

The student academic group on a college campus claims that freshman students study at least 2.5 hours per day, on average. One Introduction to Statistics class was skeptical. The class took a random sample of 30 freshman students and found a mean study time of 137 minutes with a standard deviation of 45 minutes. At α = 0.01 level, is the student academic group’s claim correct?

• \(H_{0}: \mu \geq 150\) \(H_{0}: \mu < 150\)
• \(p\text{-value} = 0.0622\)
• \(\alpha = 0.01\)
• At the 1% significance level, there is not enough evidence to conclude that freshmen students study less than 2.5 hours per day, on average.
• The student academic group’s claim appears to be correct.

9.7: Hypothesis Testing of a Single Mean and Single Proportion

Hypothesis Testing

Hypothesis testing is a tool for making statistical inferences about the population data. It is an analysis tool that tests assumptions and determines how likely something is within a given standard of accuracy. Hypothesis testing provides a way to verify whether the results of an experiment are valid.

A null hypothesis and an alternative hypothesis are set up before performing the hypothesis testing. This helps to arrive at a conclusion regarding the sample obtained from the population. In this article, we will learn more about hypothesis testing, its types, steps to perform the testing, and associated examples.

What is Hypothesis Testing in Statistics?

Hypothesis testing uses sample data from the population to draw useful conclusions regarding the population probability distribution . It tests an assumption made about the data using different types of hypothesis testing methodologies. The hypothesis testing results in either rejecting or not rejecting the null hypothesis.

Hypothesis Testing Definition

Hypothesis testing can be defined as a statistical tool that is used to identify if the results of an experiment are meaningful or not. It involves setting up a null hypothesis and an alternative hypothesis. These two hypotheses will always be mutually exclusive. This means that if the null hypothesis is true then the alternative hypothesis is false and vice versa. An example of hypothesis testing is setting up a test to check if a new medicine works on a disease in a more efficient manner.

Null Hypothesis

The null hypothesis is a concise mathematical statement that is used to indicate that there is no difference between two possibilities. In other words, there is no difference between certain characteristics of data. This hypothesis assumes that the outcomes of an experiment are based on chance alone. It is denoted as \(H_{0}\). Hypothesis testing is used to conclude if the null hypothesis can be rejected or not. Suppose an experiment is conducted to check if girls are shorter than boys at the age of 5. The null hypothesis will say that they are the same height.

Alternative Hypothesis

The alternative hypothesis is an alternative to the null hypothesis. It is used to show that the observations of an experiment are due to some real effect. It indicates that there is a statistical significance between two possible outcomes and can be denoted as \(H_{1}\) or \(H_{a}\). For the above-mentioned example, the alternative hypothesis would be that girls are shorter than boys at the age of 5.

Hypothesis Testing P Value

In hypothesis testing, the p value is used to indicate whether the results obtained after conducting a test are statistically significant or not. It also indicates the probability of making an error in rejecting or not rejecting the null hypothesis.This value is always a number between 0 and 1. The p value is compared to an alpha level, \(\alpha\) or significance level. The alpha level can be defined as the acceptable risk of incorrectly rejecting the null hypothesis. The alpha level is usually chosen between 1% to 5%.

Hypothesis Testing Critical region

All sets of values that lead to rejecting the null hypothesis lie in the critical region. Furthermore, the value that separates the critical region from the non-critical region is known as the critical value.

Hypothesis Testing Formula

Depending upon the type of data available and the size, different types of hypothesis testing are used to determine whether the null hypothesis can be rejected or not. The hypothesis testing formula for some important test statistics are given below:

• z = \(\frac{\overline{x}-\mu}{\frac{\sigma}{\sqrt{n}}}\). \(\overline{x}\) is the sample mean, \(\mu\) is the population mean, \(\sigma\) is the population standard deviation and n is the size of the sample.
• t = \(\frac{\overline{x}-\mu}{\frac{s}{\sqrt{n}}}\). s is the sample standard deviation.
• \(\chi ^{2} = \sum \frac{(O_{i}-E_{i})^{2}}{E_{i}}\). \(O_{i}\) is the observed value and \(E_{i}\) is the expected value.

We will learn more about these test statistics in the upcoming section.

Types of Hypothesis Testing

Selecting the correct test for performing hypothesis testing can be confusing. These tests are used to determine a test statistic on the basis of which the null hypothesis can either be rejected or not rejected. Some of the important tests used for hypothesis testing are given below.

Hypothesis Testing Z Test

A z test is a way of hypothesis testing that is used for a large sample size (n ≥ 30). It is used to determine whether there is a difference between the population mean and the sample mean when the population standard deviation is known. It can also be used to compare the mean of two samples. It is used to compute the z test statistic. The formulas are given as follows:

• One sample: z = \(\frac{\overline{x}-\mu}{\frac{\sigma}{\sqrt{n}}}\).
• Two samples: z = \(\frac{(\overline{x_{1}}-\overline{x_{2}})-(\mu_{1}-\mu_{2})}{\sqrt{\frac{\sigma_{1}^{2}}{n_{1}}+\frac{\sigma_{2}^{2}}{n_{2}}}}\).

Hypothesis Testing t Test

The t test is another method of hypothesis testing that is used for a small sample size (n < 30). It is also used to compare the sample mean and population mean. However, the population standard deviation is not known. Instead, the sample standard deviation is known. The mean of two samples can also be compared using the t test.

• One sample: t = \(\frac{\overline{x}-\mu}{\frac{s}{\sqrt{n}}}\).
• Two samples: t = \(\frac{(\overline{x_{1}}-\overline{x_{2}})-(\mu_{1}-\mu_{2})}{\sqrt{\frac{s_{1}^{2}}{n_{1}}+\frac{s_{2}^{2}}{n_{2}}}}\).

Hypothesis Testing Chi Square

The Chi square test is a hypothesis testing method that is used to check whether the variables in a population are independent or not. It is used when the test statistic is chi-squared distributed.

One Tailed Hypothesis Testing

One tailed hypothesis testing is done when the rejection region is only in one direction. It can also be known as directional hypothesis testing because the effects can be tested in one direction only. This type of testing is further classified into the right tailed test and left tailed test.

Right Tailed Hypothesis Testing

The right tail test is also known as the upper tail test. This test is used to check whether the population parameter is greater than some value. The null and alternative hypotheses for this test are given as follows:

\(H_{0}\): The population parameter is ≤ some value

\(H_{1}\): The population parameter is > some value.

If the test statistic has a greater value than the critical value then the null hypothesis is rejected

Left Tailed Hypothesis Testing

The left tail test is also known as the lower tail test. It is used to check whether the population parameter is less than some value. The hypotheses for this hypothesis testing can be written as follows:

\(H_{0}\): The population parameter is ≥ some value

\(H_{1}\): The population parameter is < some value.

The null hypothesis is rejected if the test statistic has a value lesser than the critical value.

Two Tailed Hypothesis Testing

In this hypothesis testing method, the critical region lies on both sides of the sampling distribution. It is also known as a non - directional hypothesis testing method. The two-tailed test is used when it needs to be determined if the population parameter is assumed to be different than some value. The hypotheses can be set up as follows:

\(H_{0}\): the population parameter = some value

\(H_{1}\): the population parameter ≠ some value

The null hypothesis is rejected if the test statistic has a value that is not equal to the critical value.

Hypothesis Testing Steps

Hypothesis testing can be easily performed in five simple steps. The most important step is to correctly set up the hypotheses and identify the right method for hypothesis testing. The basic steps to perform hypothesis testing are as follows:

• Step 1: Set up the null hypothesis by correctly identifying whether it is the left-tailed, right-tailed, or two-tailed hypothesis testing.
• Step 2: Set up the alternative hypothesis.
• Step 3: Choose the correct significance level, \(\alpha\), and find the critical value.
• Step 4: Calculate the correct test statistic (z, t or \(\chi\)) and p-value.
• Step 5: Compare the test statistic with the critical value or compare the p-value with \(\alpha\) to arrive at a conclusion. In other words, decide if the null hypothesis is to be rejected or not.

Hypothesis Testing Example

The best way to solve a problem on hypothesis testing is by applying the 5 steps mentioned in the previous section. Suppose a researcher claims that the mean average weight of men is greater than 100kgs with a standard deviation of 15kgs. 30 men are chosen with an average weight of 112.5 Kgs. Using hypothesis testing, check if there is enough evidence to support the researcher's claim. The confidence interval is given as 95%.

Step 1: This is an example of a right-tailed test. Set up the null hypothesis as \(H_{0}\): \(\mu\) = 100.

Step 2: The alternative hypothesis is given by \(H_{1}\): \(\mu\) > 100.

Step 3: As this is a one-tailed test, \(\alpha\) = 100% - 95% = 5%. This can be used to determine the critical value.

1 - \(\alpha\) = 1 - 0.05 = 0.95

0.95 gives the required area under the curve. Now using a normal distribution table, the area 0.95 is at z = 1.645. A similar process can be followed for a t-test. The only additional requirement is to calculate the degrees of freedom given by n - 1.

Step 4: Calculate the z test statistic. This is because the sample size is 30. Furthermore, the sample and population means are known along with the standard deviation.

z = \(\frac{\overline{x}-\mu}{\frac{\sigma}{\sqrt{n}}}\).

\(\mu\) = 100, \(\overline{x}\) = 112.5, n = 30, \(\sigma\) = 15

z = \(\frac{112.5-100}{\frac{15}{\sqrt{30}}}\) = 4.56

Step 5: Conclusion. As 4.56 > 1.645 thus, the null hypothesis can be rejected.

Hypothesis Testing and Confidence Intervals

Confidence intervals form an important part of hypothesis testing. This is because the alpha level can be determined from a given confidence interval. Suppose a confidence interval is given as 95%. Subtract the confidence interval from 100%. This gives 100 - 95 = 5% or 0.05. This is the alpha value of a one-tailed hypothesis testing. To obtain the alpha value for a two-tailed hypothesis testing, divide this value by 2. This gives 0.05 / 2 = 0.025.

Related Articles:

• Probability and Statistics
• Data Handling

Important Notes on Hypothesis Testing

• Hypothesis testing is a technique that is used to verify whether the results of an experiment are statistically significant.
• It involves the setting up of a null hypothesis and an alternate hypothesis.
• There are three types of tests that can be conducted under hypothesis testing - z test, t test, and chi square test.
• Hypothesis testing can be classified as right tail, left tail, and two tail tests.

Examples on Hypothesis Testing

• Example 1: The average weight of a dumbbell in a gym is 90lbs. However, a physical trainer believes that the average weight might be higher. A random sample of 5 dumbbells with an average weight of 110lbs and a standard deviation of 18lbs. Using hypothesis testing check if the physical trainer's claim can be supported for a 95% confidence level. Solution: As the sample size is lesser than 30, the t-test is used. \(H_{0}\): \(\mu\) = 90, \(H_{1}\): \(\mu\) > 90 \(\overline{x}\) = 110, \(\mu\) = 90, n = 5, s = 18. \(\alpha\) = 0.05 Using the t-distribution table, the critical value is 2.132 t = \(\frac{\overline{x}-\mu}{\frac{s}{\sqrt{n}}}\) t = 2.484 As 2.484 > 2.132, the null hypothesis is rejected. Answer: The average weight of the dumbbells may be greater than 90lbs
• Example 2: The average score on a test is 80 with a standard deviation of 10. With a new teaching curriculum introduced it is believed that this score will change. On random testing, the score of 38 students, the mean was found to be 88. With a 0.05 significance level, is there any evidence to support this claim? Solution: This is an example of two-tail hypothesis testing. The z test will be used. \(H_{0}\): \(\mu\) = 80, \(H_{1}\): \(\mu\) ≠ 80 \(\overline{x}\) = 88, \(\mu\) = 80, n = 36, \(\sigma\) = 10. \(\alpha\) = 0.05 / 2 = 0.025 The critical value using the normal distribution table is 1.96 z = \(\frac{\overline{x}-\mu}{\frac{\sigma}{\sqrt{n}}}\) z = \(\frac{88-80}{\frac{10}{\sqrt{36}}}\) = 4.8 As 4.8 > 1.96, the null hypothesis is rejected. Answer: There is a difference in the scores after the new curriculum was introduced.
• Example 3: The average score of a class is 90. However, a teacher believes that the average score might be lower. The scores of 6 students were randomly measured. The mean was 82 with a standard deviation of 18. With a 0.05 significance level use hypothesis testing to check if this claim is true. Solution: The t test will be used. \(H_{0}\): \(\mu\) = 90, \(H_{1}\): \(\mu\) < 90 \(\overline{x}\) = 110, \(\mu\) = 90, n = 6, s = 18 The critical value from the t table is -2.015 t = \(\frac{\overline{x}-\mu}{\frac{s}{\sqrt{n}}}\) t = \(\frac{82-90}{\frac{18}{\sqrt{6}}}\) t = -1.088 As -1.088 > -2.015, we fail to reject the null hypothesis. Answer: There is not enough evidence to support the claim.

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FAQs on Hypothesis Testing

What is hypothesis testing.

Hypothesis testing in statistics is a tool that is used to make inferences about the population data. It is also used to check if the results of an experiment are valid.

What is the z Test in Hypothesis Testing?

The z test in hypothesis testing is used to find the z test statistic for normally distributed data . The z test is used when the standard deviation of the population is known and the sample size is greater than or equal to 30.

What is the t Test in Hypothesis Testing?

The t test in hypothesis testing is used when the data follows a student t distribution . It is used when the sample size is less than 30 and standard deviation of the population is not known.

What is the formula for z test in Hypothesis Testing?

The formula for a one sample z test in hypothesis testing is z = \(\frac{\overline{x}-\mu}{\frac{\sigma}{\sqrt{n}}}\) and for two samples is z = \(\frac{(\overline{x_{1}}-\overline{x_{2}})-(\mu_{1}-\mu_{2})}{\sqrt{\frac{\sigma_{1}^{2}}{n_{1}}+\frac{\sigma_{2}^{2}}{n_{2}}}}\).

What is the p Value in Hypothesis Testing?

The p value helps to determine if the test results are statistically significant or not. In hypothesis testing, the null hypothesis can either be rejected or not rejected based on the comparison between the p value and the alpha level.

What is One Tail Hypothesis Testing?

When the rejection region is only on one side of the distribution curve then it is known as one tail hypothesis testing. The right tail test and the left tail test are two types of directional hypothesis testing.

What is the Alpha Level in Two Tail Hypothesis Testing?

To get the alpha level in a two tail hypothesis testing divide \(\alpha\) by 2. This is done as there are two rejection regions in the curve.

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Hypothesis testing involves formulating assumptions about population parameters based on sample statistics and rigorously evaluating these assumptions against empirical evidence. This article sheds light on the significance of hypothesis testing and the critical steps involved in the process.

What is Hypothesis Testing?

Hypothesis testing is a statistical method that is used to make a statistical decision using experimental data. Hypothesis testing is basically an assumption that we make about a population parameter. It evaluates two mutually exclusive statements about a population to determine which statement is best supported by the sample data. 

Example: You say an average height in the class is 30 or a boy is taller than a girl. All of these is an assumption that we are assuming, and we need some statistical way to prove these. We need some mathematical conclusion whatever we are assuming is true.

Defining Hypotheses

Key Terms of Hypothesis Testing

• P-value: The P value , or calculated probability, is the probability of finding the observed/extreme results when the null hypothesis(H0) of a study-given problem is true. If your P-value is less than the chosen significance level then you reject the null hypothesis i.e. accept that your sample claims to support the alternative hypothesis.
• Test Statistic: The test statistic is a numerical value calculated from sample data during a hypothesis test, used to determine whether to reject the null hypothesis. It is compared to a critical value or p-value to make decisions about the statistical significance of the observed results.
• Critical value : The critical value in statistics is a threshold or cutoff point used to determine whether to reject the null hypothesis in a hypothesis test.
• Degrees of freedom: Degrees of freedom are associated with the variability or freedom one has in estimating a parameter. The degrees of freedom are related to the sample size and determine the shape.

Why do we use Hypothesis Testing?

Hypothesis testing is an important procedure in statistics. Hypothesis testing evaluates two mutually exclusive population statements to determine which statement is most supported by sample data. When we say that the findings are statistically significant, thanks to hypothesis testing. 

One-Tailed and Two-Tailed Test

One tailed test focuses on one direction, either greater than or less than a specified value. We use a one-tailed test when there is a clear directional expectation based on prior knowledge or theory. The critical region is located on only one side of the distribution curve. If the sample falls into this critical region, the null hypothesis is rejected in favor of the alternative hypothesis.

One-Tailed Test

There are two types of one-tailed test:

Two-Tailed Test

A two-tailed test considers both directions, greater than and less than a specified value.We use a two-tailed test when there is no specific directional expectation, and want to detect any significant difference.

What are Type 1 and Type 2 errors in Hypothesis Testing?

In hypothesis testing, Type I and Type II errors are two possible errors that researchers can make when drawing conclusions about a population based on a sample of data. These errors are associated with the decisions made regarding the null hypothesis and the alternative hypothesis.

How does Hypothesis Testing work?

Step 1: define null and alternative hypothesis.

We first identify the problem about which we want to make an assumption keeping in mind that our assumption should be contradictory to one another, assuming Normally distributed data.

Step 2 – Choose significance level

Step 3 – Collect and Analyze data.

Gather relevant data through observation or experimentation. Analyze the data using appropriate statistical methods to obtain a test statistic.

Step 4-Calculate Test Statistic

The data for the tests are evaluated in this step we look for various scores based on the characteristics of data. The choice of the test statistic depends on the type of hypothesis test being conducted.

There are various hypothesis tests, each appropriate for various goal to calculate our test. This could be a Z-test , Chi-square , T-test , and so on.

• Z-test : If population means and standard deviations are known. Z-statistic is commonly used.
• t-test : If population standard deviations are unknown. and sample size is small than t-test statistic is more appropriate.
• Chi-square test : Chi-square test is used for categorical data or for testing independence in contingency tables
• F-test : F-test is often used in analysis of variance (ANOVA) to compare variances or test the equality of means across multiple groups.

We have a smaller dataset, So, T-test is more appropriate to test our hypothesis.

T-statistic is a measure of the difference between the means of two groups relative to the variability within each group. It is calculated as the difference between the sample means divided by the standard error of the difference. It is also known as the t-value or t-score.

Step 5 – Comparing Test Statistic:

In this stage, we decide where we should accept the null hypothesis or reject the null hypothesis. There are two ways to decide where we should accept or reject the null hypothesis.

Method A: Using Crtical values

Comparing the test statistic and tabulated critical value we have,

• If Test Statistic>Critical Value: Reject the null hypothesis.
• If Test Statistic≤Critical Value: Fail to reject the null hypothesis.

Note: Critical values are predetermined threshold values that are used to make a decision in hypothesis testing. To determine critical values for hypothesis testing, we typically refer to a statistical distribution table , such as the normal distribution or t-distribution tables based on.

Method B: Using P-values

We can also come to an conclusion using the p-value,

Note : The p-value is the probability of obtaining a test statistic as extreme as, or more extreme than, the one observed in the sample, assuming the null hypothesis is true. To determine p-value for hypothesis testing, we typically refer to a statistical distribution table , such as the normal distribution or t-distribution tables based on.

Step 7- Interpret the Results

At last, we can conclude our experiment using method A or B.

Calculating test statistic

To validate our hypothesis about a population parameter we use statistical functions . We use the z-score, p-value, and level of significance(alpha) to make evidence for our hypothesis for normally distributed data .

1. Z-statistics:

When population means and standard deviations are known.

• μ represents the population mean, 
• σ is the standard deviation
• and n is the size of the sample.

2. T-Statistics

T test is used when n<30,

t-statistic calculation is given by:

• t = t-score,
• x̄ = sample mean
• μ = population mean,
• s = standard deviation of the sample,
• n = sample size

3. Chi-Square Test

Chi-Square Test for Independence categorical Data (Non-normally distributed) using:

• i,j are the rows and columns index respectively.

Real life Hypothesis Testing example

Let’s examine hypothesis testing using two real life situations,

Case A: D oes a New Drug Affect Blood Pressure?

Imagine a pharmaceutical company has developed a new drug that they believe can effectively lower blood pressure in patients with hypertension. Before bringing the drug to market, they need to conduct a study to assess its impact on blood pressure.

• Before Treatment: 120, 122, 118, 130, 125, 128, 115, 121, 123, 119
• After Treatment: 115, 120, 112, 128, 122, 125, 110, 117, 119, 114

Step 1 : Define the Hypothesis

• Null Hypothesis : (H 0 )The new drug has no effect on blood pressure.
• Alternate Hypothesis : (H 1 )The new drug has an effect on blood pressure.

Step 2: Define the Significance level

Let’s consider the Significance level at 0.05, indicating rejection of the null hypothesis.

If the evidence suggests less than a 5% chance of observing the results due to random variation.

Step 3 : Compute the test statistic

Using paired T-test analyze the data to obtain a test statistic and a p-value.

The test statistic (e.g., T-statistic) is calculated based on the differences between blood pressure measurements before and after treatment.

t = m/(s/√n)

• m  = mean of the difference i.e X after, X before
• s  = standard deviation of the difference (d) i.e d i ​= X after, i ​− X before,
• n  = sample size,

then, m= -3.9, s= 1.8 and n= 10

we, calculate the , T-statistic = -9 based on the formula for paired t test

Step 4: Find the p-value

The calculated t-statistic is -9 and degrees of freedom df = 9, you can find the p-value using statistical software or a t-distribution table.

thus, p-value = 8.538051223166285e-06

Step 5: Result

• If the p-value is less than or equal to 0.05, the researchers reject the null hypothesis.
• If the p-value is greater than 0.05, they fail to reject the null hypothesis.

Conclusion: Since the p-value (8.538051223166285e-06) is less than the significance level (0.05), the researchers reject the null hypothesis. There is statistically significant evidence that the average blood pressure before and after treatment with the new drug is different.

Python Implementation of Hypothesis Testing

Let’s create hypothesis testing with python, where we are testing whether a new drug affects blood pressure. For this example, we will use a paired T-test. We’ll use the scipy.stats library for the T-test.

Scipy is a mathematical library in Python that is mostly used for mathematical equations and computations.

We will implement our first real life problem via python,

In the above example, given the T-statistic of approximately -9 and an extremely small p-value, the results indicate a strong case to reject the null hypothesis at a significance level of 0.05. 

• The results suggest that the new drug, treatment, or intervention has a significant effect on lowering blood pressure.
• The negative T-statistic indicates that the mean blood pressure after treatment is significantly lower than the assumed population mean before treatment.

Case B : Cholesterol level in a population

Data: A sample of 25 individuals is taken, and their cholesterol levels are measured.

Cholesterol Levels (mg/dL): 205, 198, 210, 190, 215, 205, 200, 192, 198, 205, 198, 202, 208, 200, 205, 198, 205, 210, 192, 205, 198, 205, 210, 192, 205.

Populations Mean = 200

Population Standard Deviation (σ): 5 mg/dL(given for this problem)

Step 1: Define the Hypothesis

• Null Hypothesis (H 0 ): The average cholesterol level in a population is 200 mg/dL.
• Alternate Hypothesis (H 1 ): The average cholesterol level in a population is different from 200 mg/dL.

As the direction of deviation is not given , we assume a two-tailed test, and based on a normal distribution table, the critical values for a significance level of 0.05 (two-tailed) can be calculated through the z-table and are approximately -1.96 and 1.96.

Step 4: Result

Since the absolute value of the test statistic (2.04) is greater than the critical value (1.96), we reject the null hypothesis. And conclude that, there is statistically significant evidence that the average cholesterol level in the population is different from 200 mg/dL

Limitations of Hypothesis Testing

• Although a useful technique, hypothesis testing does not offer a comprehensive grasp of the topic being studied. Without fully reflecting the intricacy or whole context of the phenomena, it concentrates on certain hypotheses and statistical significance.
• The accuracy of hypothesis testing results is contingent on the quality of available data and the appropriateness of statistical methods used. Inaccurate data or poorly formulated hypotheses can lead to incorrect conclusions.
• Relying solely on hypothesis testing may cause analysts to overlook significant patterns or relationships in the data that are not captured by the specific hypotheses being tested. This limitation underscores the importance of complimenting hypothesis testing with other analytical approaches.

Hypothesis testing stands as a cornerstone in statistical analysis, enabling data scientists to navigate uncertainties and draw credible inferences from sample data. By systematically defining null and alternative hypotheses, choosing significance levels, and leveraging statistical tests, researchers can assess the validity of their assumptions. The article also elucidates the critical distinction between Type I and Type II errors, providing a comprehensive understanding of the nuanced decision-making process inherent in hypothesis testing. The real-life example of testing a new drug’s effect on blood pressure using a paired T-test showcases the practical application of these principles, underscoring the importance of statistical rigor in data-driven decision-making.

Frequently Asked Questions (FAQs)

1. what are the 3 types of hypothesis test.

There are three types of hypothesis tests: right-tailed, left-tailed, and two-tailed. Right-tailed tests assess if a parameter is greater, left-tailed if lesser. Two-tailed tests check for non-directional differences, greater or lesser.

2.What are the 4 components of hypothesis testing?

Null Hypothesis ( ): No effect or difference exists. Alternative Hypothesis ( ): An effect or difference exists. Significance Level ( ): Risk of rejecting null hypothesis when it’s true (Type I error). Test Statistic: Numerical value representing observed evidence against null hypothesis.

3.What is hypothesis testing in ML?

Statistical method to evaluate the performance and validity of machine learning models. Tests specific hypotheses about model behavior, like whether features influence predictions or if a model generalizes well to unseen data.

4.What is the difference between Pytest and hypothesis in Python?

Pytest purposes general testing framework for Python code while Hypothesis is a Property-based testing framework for Python, focusing on generating test cases based on specified properties of the code.

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