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hypothsis testing

- Hypotheses Exercise
- 9709_y06_sw_23
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- Hypothesis Testing (LAERD)

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for Business

Answer business questions such as:

Has the production quality level improved after introduction of

a new technique?

Is the new loan product selling more than the previous loan

product?

Has the customer satisfaction level dropped recently?

Has the employee attrition level this year changed from that of

the last 2 years average?

Has the new company policy lead to improvement of employee

productivity and motivation level?

Is price an important factor for purchase for a particular

customer segment or some other factor?

Price drop or variety of service - which one has more significant

(larger) effect on the sales of a product / service?

Insight

Convert the business question in the form of a

hypothesis (or theory or proposition)

Use statistical tools to test the correctness

of the hypothesis

Hypothesis Testing and Its Relevance

for Business

Business

Problem

formulation

Statistical

Problem

formulation

Sampling and

Statistical testing

Statistical

Conclusion

Business

conclusion

Statistical Problem Formulation

Derivation of Statistical Hypothesis (Question

/ Proposition)

Derivation of Null Hypothesis

Derivation of Alternative Hypothesis

Everyday Life

Every day we make hundreds of hypothesis

come to class and expect the seats would be there

you throw the switch and expect to ac to come on

you write with your pen and expect the writing to

appear

These are assumptions which you expect to be

true NULL HYPOTHESES

We test these ASSUMPTIONS

Null Hypothesis is an assumption we TEST

Result into failure or pass

Example 1 Point of View

Consider, a bottle of packaged drinking

water, we assuming that it has 500 ml as it is

marked 500 ml

Customers question: is there on average at

least 500 ml of water in each bottle

That is, bottle >= 500 ml

Manufacturers question: is there on average

exactly 500 ml of water in each bottle

That is, bottle = 500 ml

IMPORTANT: For the same situation two

different questions can be framed

depending upon user point of view

We are here interested in testing an

ASSUMPTION

Example 2 Assumption vs. Claim

Production manager claims that average

defect level/100 trucks in the assembly line of

trucks has reduced below 30 after a new

machine used or newly trained workmen used

Production manager is making a CLAIM and

we need to TEST this CLAIM

Defect level < 30

Assumption vs. Claim

Bottle example: testing of assumption (status

quo or existing status) that already exists

Production example: testing of claim about

something unknown (some new thing, not

status quo, changed status)

Production Example Revisited

If the production defect level is already known

as 30 (say) as certified by the Quality Dept.

and we want to test if we are still running at

that same defect level today morning, we are

then testing an assumption

Defect level = 30

Mapping of Hypotheses

Null Hypothesis

Assumption / Status Quo

It is accepted as true, but lets test if it is so

Alternative hypothesis

Claim / Unknown

It might be true, but lets test to confirm if it is so

Null Hypothesis is OPPOSITE of Alternative

Hypothesis

Both are MUTUALLY EXCLUSIVE

Null and Alternative

Only ONE item in each pair is TRUE, other one is FALSE

Null and Alternative

All statistical conclusions are made with

respect to Null Hypothesis

Reject H

0

Fail to reject H

0

We NEVER say we ACCEPT H

0

If H

0

is rejected then data supports H

1

If we test the 500ml bottle and get a sample mean

of 500.4ml. What should we conclude?

If we got 400ml?

Null Hypothesis (H

0

)

Null condition exists

Nothing new is happening

Old theory is still true

Old standard is correct

System is in control

Alternative Hypothesis (H

1

)

New theory is true

There are new standards

System is out of control

Something unexpected is happening

Generally speaking new hypothesis that

business researchers want to prove are

stated in the alternative hypothesis

Bottle Example (assumption testing)

Customers point of view (500ml bottle)

H

0

: Bottle has >= 500 ml (assumption)

H

1

: Bottle has < 500 ml

Manufacturers point of view (500ml bottle)

H

0

: Bottle has = 500 ml (assumption)

H

1

: Bottle has <> 500 ml

Production Example (claim testing)

Business context: new tool / training is

expected to improve defect level

Production Managers point of view

H

0

: Production defect level >= 30

H

1

: Production defect level < 30 (claim)

Production Example (assumption

testing version 1)

Business context: the production level running

in a stable manner no changes to any aspect,

need to see if it is really so (testing the

assumed defect level)

Same Production Managers NEW point of

view

H

0

: Production defect level = 30 (assumption)

H

1

: Production defect level <> 30

Production Example (assumption

testing version 2)

Business context: same as earlier but there is

a SUSPICION that things are not as good as

ASSUMED

Same Production Managers NEWER point of

view

H

0

: Production defect level <= 30 (assumption)

H

1

: Production defect level > 30

Example

It was reported that the % area green in BBSR in

1992 was 60%. There was a cyclone in the year

2000 and after that BBSR has experienced rapid

urbanization, construction. So it is suspected that

the % area has decreased from the original 60%.

Derive the null and alternative hypotheses for

this problem for the environment analyst.

What is the assumption / known / given here?

What is the claim made?

Example

During normal times the attrition rate in the IT

industry is around 10%. However, during the

recession a particular company fears that its

attrition rate has increased. Derive the null

and alternative hypotheses for this problem

for the environment analyst.

What is the assumption / known / given here?

What is the claim made?

Hypothesis Formulation

Depends upon

Point of view

Problem context

What is known upfront

More Examples of Business

Hypotheses

Test whether a production line process is out of control

Provide conclusive evidence that a new management

leadership approach is significantly more effective than an

old one

Verify quality claims by a parts supplier

Older workers are more loyal to a company

Implementation of Six Sigma quality approach in

manufacturing will result in greater productivity

The price of scrap metal is a good indicator of the industrial

production index six months later

Companies with more than $1 billion of assets spend a

higher percentage of their annual budget on advertising

than do companies with less than $1 billion of assets.

Broad Steps in HT

Formulate a hypothesis in a form that it can

be statistically tested

Test the hypothesis statistically after gathering

necessary evidence (data)

Interpret the results of the tests in business

terms

Which one is desirable?

Usually business researchers undertake study

to determine if their new hypothesis is

correct, they hope that the alternative

hypothesis will be proven true

But a manufacturer who is testing for process

control is most likely hoping that the

alternative hypothesis is not proven true

Sampling and Test

Collect sample from the population about which

the Hypothesis needs to be tested

Calculated the chances of getting a sample which

we get from a population having a hypothesized

mean (or proportion)

Based on the level of strictness (better known

as statistical significance) decide whether the

original hypothesis is to be rejected or not to be

rejected

Exercise

How to Decide the Outcome

When do we know if we are to REJECT or NOT

REJECT the Null Hypothesis

We REJECT when the Sample statistic (mean /

proportion) is significantly or very

different from what is expected from a

population having the hypothesized

parameter

One or Two Tailed test

Two tailed test formal

Null hypothesis: H

0

: = 2

Alternative hypothesis: H

1

: 2

Use this when in doubt about direction of test OR when

interesting in testing for bi-directional possibility

One tailed test format

Null hypothesis: H

0

: = 2

Alternative hypothesis: H

1

: > 2

Should be used when the researcher knows for certain that the

outcome of a study is going to occur only in one direction OR

he/she is interested in one direction of study

Watchwords: Older, brighter, higher, lower, greater, more, less,

etc.

Rejection and Non Rejection Regions

Rejection Region

The rejection region of a statistical hypothesis

test is the range of numbers that will lead us

to reject the null hypothesis in case the test

statistic falls within this range.

The rejection region, also called the critical

region, is defined by the critical points.

Non-rejection Region

The Non-rejection region is the range of

values (also determined by the critical points)

that will lead us not to reject the null

hypothesis if the test statistic should fall

within this region.

2 Tailed tests

H

0

: =

H0

H

1

:

H0

Example, mean bulb life is 1000 hours and we

dont want higher (cost) or lower life

(customer)

1-Tailed tests

H

0

: =

H0

Left tailed or lower

tailed

H

1

: <

H0

Example, wholesaler

rejects lot of bulbs

having life

significantly lower

than 1000 hours

Right tailed or upper

tailed

H

1

: >

H0

The Significance Level

Significant difference

between sample statistic

and hypothesized

population parameter

H0

No

significant

difference

between

sample

statistic and

hypothesized

population

parameter

Distribution to Use for Hypothesis

Testing

Population SD known Population SD NOT known

n > 30 Z table Z table

n < = 30 Z table T table

Exercise

Surprise Quiz

1. The acceptance region is the acceptance of

which type of hypothesis?

2. less than, more than type of hypothesis is

tested using one-tailed or two-tailed test?

3. <, > sign appears in null or alternative

hypothesis?

4. If alpha (significance level) for a two tailed test is

0.10 (10%) how much area fall in each tail?

5. If n (sample size) = 25 and population SD is

known which kind of distribution to be used z

or t?

Surprise Quiz

1. If n (sample size) = 35 and sample SD = 1.4

which kind of distribution to be used z or t?

2. If we want to do a 1-tailed HT using t-dist at

alpha = 0.01 when the sample size =24 what

value of t should be used?

3. If we want to do the same thing as in (2) but a

two-tailed test what value of t to be used?

4. What is the value of SE of proportions if

hypothesized proportion = 0.5, sample

proportion = 0.3 and sample size = 25?

Use of Raw and Standardized Scale for

HT

Raw scale used for the x-axis

Standardized scale used for the x-axis

Results remain same

5 Step Process for HT using

Standardized Scale

1. Decide one or two tailed test required, state

hypotheses, state level of significance ()

2. Decide which distribution to use z or t, find

critical values on the standard scale

3. Calculate SE of the sample statistic, use it to

convert Raw score to Standardized score

4. Sketch distribution and mark the critical

points, and the standardized sample score

5. Compare and conclude

Exercise

Testing of Proportions

SE of proportion =

Use Binomial distribution to construct critical

regions

But if np and nq each at least = 5, then free to

use Normal distribution (z)

Exercise

Type I and Type II Errors

Type I Error

Rejecting a null hypothesis when it is true (pessimistic!)

Innocent person sent to jail!

The probability of committing a Type I error is called , the level

of significance. i.e.

= P(Reject H

0

|H

0

is true)

Type II Error

Accepting a null hypothesis when it is false (gullible/optimistic!)

Give the benefit of the doubt! Declare guilty as innocent!

The probability of committing a Type II error is called , i.e.,

= P(Accept H

0

|H

0

is false)

Decision Table for Hypothesis Testing

Significance Level and Type I Error

High value of => high significance level =>

smaller acceptance region => higher

probability of rejecting H

0

=> Type I error

Hypothesis Testing Process

Exercise

A random sample of size 113 is taken,

resulting in a sample mean of 1215 and

population standard deviation of 100. Assume

x is normally distributed and use this

information and = 0.10 to test the following

hypothesis:

H

0

: = 1200

H

1

: 1200

Try the same test at = 0.11 = 0.12

Exercise

A survey of CPAs across the US found that the

average net income for sole proprietor CPAs is

$74,914. Because the survey is now more than

seven years old, an accounting researcher wants

to test this figure by taking a random sample of

112 sole proprietor accountants in the US to

determine whether the net income figure

changed. Suppose the 112 CPAs who respond

produce a sample mean of $78,695. Assume the

population SD of net incomes for sole proprietor

CPAs is $14,530 and = 0.05

Exercise

According to the US Bureau of Labor Statistics, the

average weekly earnings of a production worker in

1997 were $424.20. suppose a labor researcher wants

to test to determine whether this figure is still accurate

today. The researcher randomly selects 54 production

workers from across the US and obtains a

representative earnings statement for one week from

each. The resulting sample average is $423.69, with a

SD of $33.90. Use these data along with a 5% level of

significance to determine whether the mean weekly

earnings of a production worker have changed.

Exercise

A manufacturing firm has been averaging 18.2

orders per week for several year. However,

during a recession, orders appeared to slow.

Suppose the firms production manager

randomly samples 32 weeks and finds a

sample mean of 15.6 orders, with a sample SD

of 2.3 orders. Test to determine whether the

average number of orders is down by using

= 0.10.

Use of t-distribution

When ALL the following are true:

Sample size less than 30

Population SD not known

Underlying population is Normal or near Normal

Exercise

Suppose that in past years the average price per

square foot for warehouses in the US has been

$32.28. A national real estate investor wants to

determine whether the figure has changed now.

The investor hires a researcher who randomly

samples 19 warehouses that are for sale across

the US and finds the mean price per square foot

is $31.67 with an SD of $1.29. If the researcher

uses a 5% level of significance, what statistical

conclusion can be reached? What are the

hypotheses?

Steps in Hypothesis Testing

1. State the H

0

2. State the H

1

3. Determine the appropriate test statistic and sampling

distribution to be used

4. Collect data and determine the test statistic

5. Find the acceptable and non acceptable regions based

on the level of significance and appropriate formula

for estimation population SD(s) and SE of the statistic

6. Find where the test statistic falls

7. Conclude if H

0

is to be accepted or rejected

Two Sample Hypothesis Testing

Testing of difference between means

SE of the difference between mean can be

calculated using when sample sizes are > 30

When sample sizes are <= 30 then use t-dist

assuming population variances are equal. The d.f. =

n

1

+n

2

-2

Exercise

A business analyst is testing whether there is

difference in the average wage of an advertising

manager and an auditing manager. A random

sample of 32 advertising managers from across

the US is taken and asked about their salary. A

mean salary of 70.7 (in $1000) and SD of 16.253

was observed. A similar random sample of 34

auditing managers is taken and asked about their

salary. A mean salary of 62.187 (in $1000) and SD

of 12.90 was observed. Test the analysts

hypothesis at level of significance, = 0.05

Exercise

Now that the business analyst knows that

there is significant difference is salary of the

advertising and auditing manager. From

common sense (by looking at the two sample

data) she feels that the advertising managers

earn more, on the average, than do auditing

managers. Please confirm this using statistical

tests at same significance level as earlier.

Small samples

Exercise

A coffee manufacturer is interested in finding if there is any

difference in the average daily coffee consumption of

regular-coffee drinkers and decaffeinated-coffee drinkers.

Its researcher randomly selects 13 regular-coffee drinkers

and asks how many cups of coffee per day they drink. He

randomly locates 15 decaffeinated-coffee drinkers and asks

how many cups of coffee per day they drink. The average

for the regular coffee drinkers in 4.35 cups, with an SD of

1.2 cups. The average for the decaffeinated-coffee drinkers

is 6.84 cups, with an SD of 1.42 cups. The researcher

assumes, for each population, that the daily consumption is

normally distributed, and he does a test at 5% significance

level to find out if there is difference in the population

averages.

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