Analysis of Variance (ANOVA) is 

a statistical formula used to compare variances across

the means (or average) of different groups. A range of scenarios use it to determine if there
is any difference between the means of different groups.

Analysis of variance is a collection of statistical models and their associated estimation procedures
used to analyze the differences among means. ANOVA was developed by the statistician Ronald
Fisher. 

What is Analysis of Variance (ANOVA)?

Analysis of variance (ANOVA) is an analysis tool used in statistics that splits
an observed aggregate variability found inside a data set into two parts:
systematic factors and random factors. The systematic factors have a
statistical influence on the given data set, while the random factors do not.
Analysts use the ANOVA test to determine the influence that independent
variables have on the dependent variable in a regression study.

The t- and z-test methods developed in the 20th century were used for

statistical analysis until 1918, when Ronald Fisher created the analysis of
variance method.

ANOVA is also called the Fisher analysis of variance, and it is the extension of
the t- and z-tests. The term became well-known in 1925, after appearing in Fisher's
book, "Statistical Methods for Research Workers."
It was employed in experimental psychology and later expanded to subjects that
were more complex.

KEY TAKEAWAYS

 Analysis of variance, or ANOVA, is a statistical method that separates

observed variance data into different components to use for additional
tests.
 A one-way ANOVA is used for three or more groups of data, to gain
information about the relationship between the dependent and
independent variables.
 If no true variance exists between the groups, the ANOVA's F-ratio
should equal close to 1.
The Formula for ANOVA is:
F= MST
MSE

F=MSE/MSTwhere:
F=ANOVA coefficient
MST=Mean sum of squares due to treatment
MSE=Mean sum of squares due to error

What Does the Analysis of Variance Reveal?

The ANOVA test is the initial step in analyzing factors that affect a given data
set. Once the test is finished, an analyst performs additional testing on the
methodical factors that measurably contribute to the data set's inconsistency.
The analyst utilizes the ANOVA test results in an f-test to generate additional
data that aligns with the proposed regression models.

The ANOVA test allows a comparison of more than two groups at the same
time to determine whether a relationship exists between them. The result of
the ANOVA formula, the F statistic (also called the F-ratio), allows for the
analysis of multiple groups of data to determine the variability between
samples and within samples.

If no real difference exists between the tested groups, which is called the null
hypothesis, the result of the ANOVA's F-ratio statistic will be close to 1. The
distribution of all possible values of the F statistic is the F-distribution. This is
actually a group of distribution functions, with two characteristic numbers,
called the numerator degrees of freedom and the denominator degrees of
freedom.

Example of How to Use ANOVA

A researcher might, for example, test students from multiple colleges to see if
students from one of the colleges consistently outperform students from the
other colleges. In a business application, an R&D researcher might test two
different processes of creating a product to see if one process is better than
the other in terms of cost efficiency.

The type of ANOVA test used depends on a number of factors. It is applied

when data needs to be experimental. Analysis of variance is employed if
there is no access to statistical software resulting in computing ANOVA by
hand. It is simple to use and best suited for small samples. With many
experimental designs, the sample sizes have to be the same for the various
factor level combinations.

ANOVA is helpful for testing three or more variables. It is similar to multiple

two-sample t-tests. However, it results in fewer type I errors and is
appropriate for a range of issues. ANOVA groups differences by comparing
the means of each group and includes spreading out the variance into
diverse sources. It is employed with subjects, test groups, between groups
and within groups.

One-Way ANOVA Versus Two-Way ANOVA

There are two main types of ANOVA: one-way (or unidirectional) and two-
way. There also variations of ANOVA. For example, MANOVA (multivariate
ANOVA) differs from ANOVA as the former tests for multiple dependent
variables simultaneously while the latter assesses only one dependent
variable at a time. One-way or two-way refers to the number of independent
variables in your analysis of variance test. A one-way ANOVA evaluates the
impact of a sole factor on a sole response variable. It determines whether all
the samples are the same. The one-way ANOVA is used to determine
whether there are any statistically significant differences between the means
of three or more independent (unrelated) groups.

A two-way ANOVA is an extension of the one-way ANOVA. With a one-way,

you have one independent variable affecting a dependent variable. With a
two-way ANOVA, there are two independents. For example, a two-way
ANOVA allows a company to compare worker productivity based on two
independent variables, such as salary and skill set. It is utilized to observe the
interaction between the two factors and tests the effect of two factors at the
same time.

Learn the Basics of Trading and Investing

Looking to learn more about trading and investing? No matter your learning
style, there are more than enough courses to get you started. With Udemy,
you’ll be able to choose courses taught by real-world experts  and learn at
your own pace, with lifetime access on mobile and desktop. You’ll also be
able to master the basics of day trading, option spreads, and more. Find out
more about Udemy and get started today.
Analysis of Variances (ANOVA)
Analysis of variances (ANOVA) is a statistical examination of the differences between
all of the variables used in an experiment. 
more
Two-Way ANOVA
A two-way ANOVA test is a statistical test used to determine the effect of two nominal
predictor variables on a continuous outcome variable. 
more
T-Test Definition
A t-test is a type of inferential statistic used to determine if there is a significant
difference between the means of two groups, which may be related in certain features.
 more
What Does Statistics Study?
Statistics is the collection, description, analysis, and inference of conclusions from
quantitative data.
 more
Test Definition
A test is when a stock’s price approaches an established support or resistance level set
by the market.
 more
Understanding the Least Squares Method
The least squares method is a statistical technique to determine the line of best fit for a
model, specified by an equation with certain parameters to observed data.
When to use a one-way ANOVA
Use a one-way ANOVA when you have collected data about one categorical
independent variable and one quantitative dependent variable. The independent
variable should have at least three levels (i.e. at least three different groups or
categories).

ANOVA tells you if the dependent variable changes according to the level of the
independent variable. For example:

 Your independent variable is social media use, and you assign groups
to low, medium, and high levels of social media use to find out if there is a
difference in hours of sleep per night.
 Your independent variable is brand of soda, and you collect data
on Coke, Pepsi, Sprite, and Fanta to find out if there is a difference in the price
per 100ml.
 You independent variable is type of fertilizer, and you treat crop fields with
mixtures 1, 2 and 3 to find out if there is a difference in crop yield.

The null hypothesis (H0) of ANOVA is that there is no difference among group means.

The alternate hypothesis (Ha) is that at least one group differs significantly from the
overall mean of the dependent variable.

If you only want to compare two groups, use a t-test instead.

How does an ANOVA test work?

ANOVA determines whether the groups created by the levels of the independent
variable are statistically different by calculating whether the means of the treatment
levels are different from the overall mean of the dependent variable.

If any of the group means is significantly different from the overall mean, then the null
hypothesis is rejected.

ANOVA uses the F-test for statistical significance. This allows for comparison of multiple
means at once, because the error is calculated for the whole set of comparisons rather
than for each individual two-way comparison (which would happen with a t-test).

The F-test compares the variance in each group mean from the overall group variance.
If the variance within groups is smaller than the variance between groups, the F-test will
find a higher F-value, and therefore a higher likelihood that the difference observed is
real and not due to chance.
ssumptions of ANOVA
The assumptions of the ANOVA test are the same as the general assumptions for any
parametric test:

1. Independence of observations: the data were collected using statistically-valid

methods, and there are no hidden relationships among observations. If your data
fail to meet this assumption because you have a confounding variable that you
need to control for statistically, use an ANOVA with blocking variables.
2. Normally-distributed response variable: The values of the dependent variable
follow a normal distribution.
3. Homogeneity of variance: The variation within each group being compared is
similar for every group. If the variances are different among the groups, then
ANOVA probably isn’t the right fit for the data.

Performing a one-way ANOVA

While you can perform an ANOVA by hand, it is difficult to do so with more than a few
observations. We will perform our analysis in the R statistical program because it is free,
powerful, and widely available. For a full walkthrough of this ANOVA example, see our
guide to performing ANOVA in R.

The sample dataset from our imaginary crop yield experiment contains data about:

 fertilizer type (type 1, 2, or 3)

 planting density (1 = low density, 2 = high density)
 planting location in the field (blocks 1, 2, 3, or 4)
 final crop yield (in bushels per acre).

This gives us enough information to run various different ANOVA tests and see which
model is the best fit for the data.

For the one-way ANOVA, we will only analyze the effect of fertilizer type on crop yield.

Sample dataset for ANOVA

After loading the dataset into our R environment, we can use the command aov() to run
an ANOVA. In this example we will model the differences in the mean of the response
variable, crop yield, as a function of type of fertilizer.

One-way ANOVA R codeone.way <- aov(yield ~ fertilizer, data = crop.data)

Interpreting the results

To view the summary of a statistical model in R, use the summary() function.

One-way ANOVA model summary R codesummary(one.way)

The summary of an ANOVA test (in R) looks like this:

The ANOVA output provides an estimate of how much variation in the dependent
variable that can be explained by the independent variable.

 The first column lists the independent variable along with the

model residuals (aka the model error).
 The Df column displays the degrees of freedom for the independent variable
(calculated by taking the number of levels within the variable and subtracting 1),
and the degrees of freedom for the residuals (calculated by taking the total
number of observations minus 1, then subtracting the number of levels in each of
the independent variables).
 The Sum Sq column displays the sum of squares (a.k.a. the total variation)
between the group means and the overall mean explained by that variable. The
sum of squares for the fertilizer variable is 6.07, while the sum of squares of the
residuals is 35.89.
 The Mean Sq column is the mean of the sum of squares, which is calculated by
dividing the sum of squares by the degrees of freedom.
 The F-value column is the test statistic from the F test: the mean square of each
independent variable divided by the mean square of the residuals. The larger the
F value, the more likely it is that the variation associated with the independent
variable is real and not due to chance.
 The Pr(>F) column is the p-value of the F-statistic. This shows how likely it is that
the F-value calculated from the test would have occurred if the null hypothesis of
no difference among group means were true.

Because the p-value of the independent variable, fertilizer, is significant (p < 0.05), it is
likely that fertilizer type does have a significant effect on average crop yield.