HYPOTHESIS TESTING

By: Preethi.A.Prakash
Section G
INTRODUCTION
• “A Hypothesis test is a statistical test that is used to determine whether there is
enough evidence in a sample of data to infer that a certain condition is true for the
entire population.”
• Hypothesis Testing is basically an assumption that we make about the population
parameter.
For example, when your car breaks down you will make an educated guess that
there may be not enough petrol or may be some technical problem. Then you take
car to the nearest workshop to validate your guess/assumption/hypothesis.
Depending on the mechanic’s answer you will reject one hypothesis and accept
another hypothesis.
Here Null hypothesis is “not enough petrol”; Alternate hypothesis is may be some
technical problem.
Hypothesis testing was introduced by Ronald Fisher, Jerzy Neyman, Karl Pearson
and Pearson’s son, Egon Pearson.
A hypothesis test examines two opposing
hypotheses about a population: the null
hypothesis and the alternative hypothesis.
• Null hypothesis (H0):
The null hypothesis states that a
population parameter is equal to a value.
The null hypothesis is often an initial
claim that researchers specify using
previous research or knowledge.

• Alternative Hypothesis (H1):

The alternative hypothesis states that the
population parameter is different than the
value of the population parameter in the
null hypothesis. The alternative
hypothesis is what you might believe to
be true or hope to prove true
KEY TERMS AND CONCEPTS
• Level of significance: Refers to the degree of significance in which we accept or reject the null-
hypothesis. 100% accuracy is not possible for accepting or rejecting a hypothesis, so we therefore
select a level of significance that is usually 5%.
• Type I error: When we reject the null hypothesis, although that hypothesis was true. Type I error
is denoted by alpha. In hypothesis testing, the normal curve that shows the critical region is called
the alpha region.
• Type II errors: When we accept the null hypothesis but it is false. Type II errors are denoted by
beta. In Hypothesis testing, the normal curve that shows the acceptance region is called the beta
region.
• One-tailed test: When the given statistical hypothesis is one value like H0: μ1 = μ2, it is called the
one-tailed test.
• Two-tailed test: When the given statistics hypothesis assumes a less than or greater than value, it
is called the two-tailed test.
• Region of acceptance: The region of acceptance is a range of values. If the test statistic falls
within the region of acceptance, the null hypothesis is not rejected. The region of acceptance is
defined so that the chance of making a Type I error is equal to the significance level.
• The set of values outside the region of acceptance is called the region of rejection. If the test
statistic falls within the region of rejection, the null hypothesis is rejected. In such cases, we say
that the hypothesis has been rejected at the α level of significance.
 SIMPLE EXAMPLE TO UNDERSTAND
HYPOTHESIS TESTING
You can follow six basic steps to correctly set up and perform a hypothesis test.
For example, the manager of a pipe manufacturing facility must ensure that the
diameters of its pipes equal 5cm. The manager follows the basic steps for doing a
hypothesis test.
1. Specify the hypotheses:
• First, the manager formulates the hypotheses. The null hypothesis is: The population mean of
all the pipes is equal to 5 cm. formally, this is written as: H0: μ = 5
• Then, the manager chooses from the following alternative hypotheses:
2. Determine the power and sample size for the test.
The manager uses a power and sample size calculation to determine how many pipes they
need to measure to have a good chance of detecting a difference of 0.1 cm or more from the
target diameter.

3. Choose a significance level (also called alpha or α).

The manager selects a significance level 0.05, which is the most commonly used
significance level.

4. Collect the data.

They collect a sample of pipes and measure their diameters.

5. Compare the p-value from the test to the significance level.

After they perform the hypothesis test, the manager obtains a p-value of 0.004. The p-value
is less than the significance level of 0.05.

6. Decide whether to reject or fail to reject the null hypothesis.

The manager rejects the null hypothesis and concludes that the mean pipe diameter of all
pipes is not equal to 5cm.
BUSINESS APPLICATION
• In a business context, a hypothesis test may be set up in order to explain how much an
increase in labour affects productivity. Thus, hypothesis testing serves to explore the
relationship between two or more variables in an experimental setting.
• Business managers may then use the results of a hypothesis test when making
management decisions. Hypothesis testing allows managers to examine causes and effects
before making a crucial management decision.
• For example, your company wants to increase sales by funding a new marketing
campaign. It uses the campaign in one region of the country to test the effects and begins
collecting data to see whether the campaign has had its desired effect. Your company will
only continue the new campaign nationally if it believes sales will rise by more than 25%.
• To test the claim, you can perform hypothesis testing on the sample data collected from
the test region. You can then analyze and present your results to help determine whether
to use the campaign nationally. Correctly interpreting the results will affect your
company’s ability to make the optimal business decision and have a profound impact on
its future operations.
How Hypotheses Help
Essentially good hypotheses lead decision-makers to new and better ways to achieve the
business goals. When you need to make decisions such as how much you should spend on
advertising or what effect a price increase will have your customer base, it’s easy to make
wild assumptions or get lost in analysis paralysis. A business hypothesis solves this
problem, because, at the start, it’s based on some foundational information. In all of science,
hypotheses are grounded in theory. Theory tells you what you can generally expect from a
certain line of inquiry.

A hypothesis based on years of business research in a particular area, then, helps you focus,
define and appropriately direct your research. You won’t go on a wild goose chase to prove
or disprove it. A hypothesis predicts the relationship between two variables. If you want to
study pricing and customer loyalty, you won’t waste your time and resources studying
tangential areas.
Marketing Support
One of the most important hypotheses to make in a business is the cost of acquiring a
customer. The viability as a business is founded on ensuring that the customers bring more
money than it costs to get them in the door. Hypothesizing this number informs not only the
pricing strategy but also the marketing efforts and the rest of overhead expenses. You can
also make predictions about the lifetime value of each customer to determine how much
marketing need to be done. Businesses frequently attempt to guesstimate how long a
customer will stick around and how much sales to each one will contribute to your profit.

In real life, hypotheses are honed and perfected over time through refining of basic
questions, assumptions and research methods. In addition, you may have more than one
hypothesis to explain the observations, such as why the product failed or why morale is
sinking in the office.
OTHER APPLICATIONS OF HYPOTHESIS
REFERENCES
• https://smallbusiness.chron.com/hypothesis-testing-used-business-22682.html
• https://www.referenceforbusiness.com/management/Gr-Int/Hypothesis-Testing.html
• http://timkastelle.org/blog/2016/06/the-magic-in-lean-startup-is-hypothesis-testing/
• https://www.statisticssolutions.com/hypothesis-testing/
• https://statistics.laerd.com/statistical-guides/hypothesis-testing.php
• https://medium.com/@thecodingcookie/hypothesis-testing-92b7270976de
• https://towardsdatascience.com/hypothesis-testing-in-real-life-47f42420b1f7