BUSINESS ANALYTICS MODULE 3

Hypothesis Testing

→ We use hypothesis tests to substantiate a claim about a population mean (or other population parameter).
• The null hypothesis (H0) is a statement about a topic of interest about the population. It is typically based on
historical information or conventional wisdom. We always start a hypothesis test by assuming that the null
hypothesis is true and then test to see if we can nullify it using evidence from a sample. The null hypothesis is
the opposite of the hypothesis we are trying to prove (the alternative hypothesis).
• The alternative hypothesis (Ha) is the theory or claim we are trying to substantiate.

→ Before conducting a hypothesis test:

• Determine whether to analyze a change in a single population or compare two populations.
• Determine whether to perform a one-sided or two-sided hypothesis test.

→ To conduct a hypothesis test, we must follow these steps:

• State the null and alternative hypotheses.
• Choose the level of significance for the test.
• Gather data about a sample or samples.
• To determine whether the sample is highly unlikely under the assumption that the null hypothesis is true,
construct the range of likely sample means or calculate the p-value.
→ The p-value is the likelihood of obtaining a sample as extreme as the one we’ve obtained, if the null
hypothesis is true.
→ The p-value of a one-sided hypothesis test is half the p-value of a two-sided hypothesis test.
→ If the sample mean falls in the range of likely sample means, or if its p-value is greater than the stated
significance level, we do not have sufficient evidence to reject the null hypothesis.
→ If the sample mean falls in the rejection region, or if it has a p-value lower than the stated significance
level, we have sufficient evidence to reject the null hypothesis. We can never accept the null hypothesis.

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Hypothesis Testing

→ Trade-offs: The higher the confidence level (and therefore the lower the significance level), the lower the chance of
rejecting the null hypothesis when it is true (type I error or false positive). But the higher the confidence level, the
higher the chance of not rejecting it when it is false (type II error or false negative).
• The table below illustrates the differences between a type I or type II error, assuming a 95% confidence level:

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 BUSINESS ANALYTICS MODULE 3
Hypothesis Testing

EXCEL SUMMARY

Recall the Excel functions and analyses covered in this course and make sure to familiarize yourself with all of the
necessary steps, syntax, and arguments. We have provided some additional information for the more complex
functions listed below.

→ Calculating the range of likely sample means using CONFIDENCE.NORM or CONFIDENCE.T

→ =T.TEST(array1, array2, tails, type)

• Returns the p-value associated with a given t-test.
• array1 is a set of numerical values or cell references.
• array2 is a set of numerical values or cell references. If we only have one set of data, for the second data set
we create a column for which every entry is the historical mean.
• tails is the number of tails for the distribution. It should be set to 1 to perform a one-sided test; to 2 to perform
a two-sided test.
• type can be 1, 2, or 3.
→ Type 1 is a paired test and is used when the same group is tested twice to provide paired “before and
after” data for each member of the group.
→ Type 2 is an unpaired test in which the samples are assumed to have equal variances.
→ Type 3 is an unpaired test in which the samples are assumed to have unequal variances. Unless we have
a good reason to believe two samples have equal variances, we typically use type 3 when conducting an
unpaired test.

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