Discussion Question: Chi Square Test

In numerous fields, involving business, social sciences, healthcare, and more, statistical
analysis is essential for developing significant knowledge from data and for drawing trustworthy
conclusions. One particular method that can be used in this fields is Chi Square test, that
determines if there is a significant association between two or more variables of categorical data.
To determine significant association, we have two types of tests; Chi square test for Variance and
Chi square test for Independence. Chi-Square test for Variance is the test that examines whether
the observed frequencies differ significantly from the expected frequencies within one
categorical variable, when variance are equal across all categorial variable (Champ, 1938).
Whereas, Chi-square test for Independence is test that examines whether the observed
frequencies in one categorical variable are independent or related to that of frequencies of
categories in the other variable. If Chi square test for Variance compares the variance of a sample
to a known or expected variance, Chi square test for Independence compares and determines the
significant association between the two categorical variables. As stated by Camp (1938), the
Chi-Square test for variance, which is a parametric test that supposes a particular distribution for
the data, aims to make predictions about the distribution of quantitative data. Contrarily, the Chi-
Square test for independence is a non-parametric test, meaning it does not make any assumptions
about the data's distribution and is appropriate for both quantitative and categorical data.

We know that,

Formula for Chi- Square test for variance is given by:

s²
χ ²=(n−1)
σ²

Where,

X2 = Chi- Square test statistic

n = Size of sample

s2 = Sample variance

𝜎2 = Hypothesized Variance of Population

Here, we are provided with only one categorical variable and need to compare variance
with in this category against the hypothesized variance of population. So, when we are provided
with only one categorial variable and have to compare the variance with in the categories against
expected or hypothesized value, then we would definitely use Chi-Square test for Variance. The
Chi-Square test for variance should be used if the goal is to determine whether the variance of a
population equals a given value.

Formula for Chi- Square test for Independence is given by:

 χ² = Σ ((OF - EF)² / EF)

Where,

X2 = Chi- Square test statistic

OF = Observed frequency

EF = Expected Frequency

Here, we are provided with observed frequency and expected frequency, so it is

appropriate to use this test when there are two categorical variable and want to assess where they

are associated or independent to each other. The Chi-Square test for independence becomes an

option if there is any doubt about whether these assumptions are being met. On the other hand,

the Chi-Square test for independence is the best option if the goal is to examine the relationship

between two categorical variables.

As an illustration, a cosmetics company makes a popular lipstick product in three

different shades. The marketing group wants to make sure that the ratios of sales for each shade

correspond to the company's intended distribution. 40% for Shade A, 30% for Shade B, and 30%

for Shade C make up the expected distribution. The business is interested in learning if the

observed and expected sales proportions differ drastically. The Chi-Square test for variance can

be used by the marketing team to compare the observed sales proportions for each shade with the

desired distribution. The test will reveal whether there is a significant discrepancy between the

observed and expected sales proportions. If the test results are not statistically significant, it

means that the company's target distribution is well represented by the witnessed sales

proportions, and that marketing efforts are successful in accomplishing the intended market share

for each shade. If the test is statistically significant, however, the business might need to look

into the causes of the deviations. To bring the sales proportions back in line with the desired
distribution, this insight may lead to changes in marketing tactics, product promotions, or

pricing.

Another illustration is when an online retailer wants to know if the buying habits of its

customers and the ages of those customers are related. Customers have been divided into three

age categories: 18–25, 26–35, and 36–45. Electronics, fashion, and home & living comprise the

three categories that make up the product preferences. The company wants to know if there are

significant differences in product preferences between different age groups. The Chi-Square test

for independence can be used by the e-commerce company to examine the relationship among

age groups and product preferences. The test will determine whether there is a significant

correlation or independence between the observed distribution of product preferences and

customer age groups. The company can adjust its marketing plans and product offerings to suit

the preferences of various age segments if the test reveals a significant relationship between age

groups and product preferences. For instance, if the study shows that younger age groups prefer

the Electronics category, the business can direct its advertising and promotions toward them.

Similar to this, if there is a strong correlation between the Home & Living category and older age

groups, the business can plan its marketing strategy to effectively target this market segment.

In conclusion, there are differences between the Chi-Square tests for variance and

independence in business scenarios. The first is helpful for comparing observed data to an

expected distribution, while the second assists in determining connections between categorical

variables. Businesses can gain insightful information from running these tests that helps them

make decisions and implement targeted strategies to improve their performance in the market.

Reference
Camp, B. H. (1938). Further Interpretations of the Chi-Square Test. Journal of the American

Statistical Association, 33(203), 537–542. https://doi.org/10.2307/2279691

Reference
Camp, B. H. (1938). Further Interpretations of the Chi-Square Test. Journal of the American

Statistical Association, 33(203), 537–542. https://doi.org/10.2307/2279691