TESTING OF HYPOTHESIS

What is a Hypothesis?

A hypothesis is an assumption about the population

parameter.
Aparameter is a characteristic of the population, like its
mean or variance.
 It
is the population, not the sample, that we want to make
an infernece about from limited data
 The parameter must be identified before analysis.
Astatistic is a characteristic of the sample, like sample
mean or sample variance

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 The Null Hypothesis, H0
• States the Assumption (numerical) to be tested
for possible rejection under the assumption
that the null hypothesis is TRUE.
• e.g. The average sale of showroom is at
least 3.0 lakh (H0: m ³ 3.0)

•Always contains the ‘ = ‘ sign

•The Null Hypothesis may or may not be rejected.
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 The Alternative Hypothesis, H1
• Is the opposite of the null hypothesis e.g.
The average sale of a showroom is less
than 3.0 (H1: m< 3.0)
• Never contains the ‘=‘ sign
• The Alternative Hypothesis may or may
not be accepted
• Is generally the hypothesis that is believed
to be true by the researcher

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Steps in Conducting a Hypothesis Test

 Step 1. Set up H0 and Ha

 Step 2. Identify the nature of the sampling
distribution curve and specify the
appropriate test statistic
 Step 3. Determine whether the hypothesis
test is one-tailed or two-tailed

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Steps in Conducting a Hypothesis Test
(Cont’d)

 Step 4. Taking into account the specified significance level, determine the
critical value (two critical values for a two-tailed test) for the test statistic from
the appropriate statistical table

 Step 5. State the decision rule for rejecting H0

 Step 6. Compute the value for the test statistic from the sample data

 Step 7. Using the decision rule specified in step 5, either reject H0 or reject Ha

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 Identify the Problem

Steps:
State the Null Hypothesis (H0: m ³ 3.0)
State its opposite, the Alternative

Hypothesis (H1: m < 3.0)

Hypotheses are mutually exclusive &
exhaustive
Sometimes it is easier to form the alternative

hypothesis first.

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 Level of Significance, a
• Defines Unlikely Values of Sample Statistic
if Null Hypothesis Is True
 Called Rejection Region of Sampling
Distribution
• Designated a (alpha)
 Typical values are 0.01, 0.05, 0.10
• Selected by the Researcher at the Start
• Provides the Critical Value(s) of the Test
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 One-Tailed Hypothesis Test

The term one-tailed signifies that all values that would cause to reject H 0, are
in just one tail of the sampling distribution

Two-Tailed Hypothesis Test

Two-tailed test is one in which values of the test statistic leading to rejectioin of
the null hypothesis fall in both tails of the sampling distribution curve

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 Summary of Errors Involved in
Hypothesis Testing
Real State Inference Based on Sample Data
of Affairs
H0 is Accepted H0 is Rejected
Correct decision Type I error
H0 is True Confidence level = Significance
1-  level=*
Correct decision
Type II error
H0 is
Power = 1-
False
P (Type II error) = 

*Term  represents the maximum probability of

committing a Type I error

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How to choose between Type I and
Type II errors
• Choice depends on the cost of the error
• Choose little type I error when the cost of
rejecting the maintained hypothesis is high
– A criminal trial: convicting an innocent person
– The Exxon Valdise : Causing an oil tanker to
sink
• Choose large type I error when you have an
interest in changing the status quo
– A decision in a startup company about a new
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