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Cathy Chen Marketing Research Term 1, 2014-15

Hypothesis Testing

Hypothesis testing is a procedure used to check whether or not a stated or assumed
belief about an underlying population or process is supported by the data.

The Steps of Hypothesis Testing

Step 1. Problem Definition

Step 2. Form the Null and Alternative Hypotheses
The stated or assumed belief is called the null hypothesis (usually assume equal
to expectation, or not different from zero). The other option (which is perhaps
what data has been telling us) is that the assumed belief may not be true and is
called the alternative hypothesis.

Step 3. Choose the relevant test and compute the Test Statistic
Based on the types of question and scales, you can choose the appropriate
probability distribution and test. For example, nominal variables often involve
chi-square test. Interval and ratio-scaled variables can be analyzed using t test, z
test, F test etc. For specific test, please refer to class examples and the table on
page 3.

What is the data telling you?
Compute the sample statistic. The decision-maker computes the sample statistic
based on the sample data and calculates how much the sample statistic differs
from the presumed distribution that is established by the null hypothesis.

Step 4: Choose the critical value based on
a. Significance Level
Two ways to look at the significance level: 1) significance level = 1 confidence
level. That is, 5% significance level corresponds to 95% confidence level. 2) The
significance level is the maximum acceptable error, !. The decision-maker must
elect how much error he/she is willing to accept in making an inference about the
population from the sample data. (Note: The significance level is the maximum
probability that the null hypothesis will be rejected incorrectly, i.e. Type I error).

b. Degree of freedom
This is usually determined by the sample size as well as the parameters to be
estimated. Specifics please refer to the class examples.

c. One-tailed or two-tailed test
If H
A
is concerned with > or < (i.e., violations from H
0
in one direction, it would
be a one-tailed test. If H
A
is interested in (i.e., violations from H
0
in both
directions), it would be a two-tailed test.


2
Step 5. Compare the Test Statistic with the Critical Value and Make the Decision.
Based on the comparison, the decision-maker will:

Reject the null hypothesis if the absolute value of the sample statistic is larger
than the critical value. This implies that the evidence is so strong that the sample
statistic is very unlikely if the null hypothesis is true. Therefore, the data does not
support the null hypothesis and we will instead believe H
A
is true.

Fail to reject the null hypothesis if the absolute value of the sample statistic is
smaller than the critical value.
Conclusion: State what the decision means in terms of the business situation.



3
Table for testing Means and Proportions


Type of test Null
Hyp.
Alt Hyp. Test statistic (actual) Rejection Region
Single Mean
(Two-sided)

=
0


"
0

( )
0
X
t
s
n
!
=

| t
actual
| > t!/2

Single Mean
(One-sided)
1. =
0
>
0
Same as above

t
actual
> t!
2. =
0
<
0
Same as above

t
actual
< -t!
Comparing
Two Means
(Two-sided)

1
=
2

1
"
2

( )
1 2
2 2
1 2
1 2
X X
t
s s
n n
!
=
+

| t
actual
| > t!/2

Comparing
Two Means
(One-sided)
1.
1
=
2

1
>
2
Same as above

t
actual
> t!
2. =
0

1
<
2
Same as above

t
actual
< -t!
Single
Proportion
(Two-sided)

# = #
0


# " #
0

( )
( )
n
p p
p
z
o
!
!
=
1
"


| z
actual
| > z!/2

Single
Proportion
(One-sided)
1. # = #
0
# > #
0
Same as above

z
actual
> z!
2. # = #
0
# < #
0
Same as above

z
actual
< -z!
Comparing
Two
Proportions
(Two-sided)
#
1
= #
2
#
1
" #
2

z =
p
1
! p
2
( )
p(1! p)
n
1
+
p(1! p)
n
2


where
p =
n
1
p
1
( )
+ n
2
p
2
( )
n
1
+n
2

| z
actual
| > z!/2