Hypothesis to Be Tested: Definition and 4 Steps for Testing with Example

What Is Hypothesis Testing?

Hypothesis testing, sometimes called significance testing, is an act in statistics whereby an

analyst tests an assumption regarding a population parameter. The methodology employed by
the analyst depends on the nature of the data used and the reason for the analysis.

Hypothesis testing is used to assess the plausibility of a hypothesis by using sample data. Such
data may come from a larger population, or from a data-generating process. The word
"population" will be used for both of these cases in the following descriptions.

KEY TAKEAWAYS

• Hypothesis testing is used to assess the plausibility of a hypothesis by using sample

data.
• The test provides evidence concerning the plausibility of the hypothesis, given the
data.
• Statistical analysts test a hypothesis by measuring and examining a random sample of
the population being analyzed.
• The four steps of hypothesis testing include stating the hypotheses, formulating an
analysis plan, analyzing the sample data, and analyzing the result.

How Hypothesis Testing Works

In hypothesis testing, an analyst tests a statistical sample, with the goal of providing evidence
on the plausibility of the null hypothesis.

Statistical analysts test a hypothesis by measuring and examining a random sample of the
population being analyzed. All analysts use a random population sample to test two different
hypotheses: the null hypothesis and the alternative hypothesis.

The null hypothesis is usually a hypothesis of equality between population parameters; e.g., a
null hypothesis may state that the population mean return is equal to zero. The alternative
hypothesis is effectively the opposite of a null hypothesis (e.g., the population mean return is
not equal to zero). Thus, they are mutually exclusive, and only one can be true. However, one
of the two hypotheses will always be true.

The null hypothesis is a statement about a population parameter, such as the population mean,
that is assumed to be true.

4 Steps of Hypothesis Testing

All hypotheses are tested using a four-step process:

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 1. The first step is for the analyst to state the hypotheses.
2. The second step is to formulate an analysis plan, which outlines how the data will be
evaluated.
3. The third step is to carry out the plan and analyze the sample data.
4. The final step is to analyze the results and either reject the null hypothesis, or state that
the null hypothesis is plausible, given the data.1

Real-World Example of Hypothesis Testing

If, for example, a person wants to test that a penny has exactly a 50% chance of landing on
heads, the null hypothesis would be that 50% is correct, and the alternative hypothesis would
be that 50% is not correct.

Mathematically, the null hypothesis would be represented as Ho: P = 0.5. The alternative
hypothesis would be denoted as "Ha" and be identical to the null hypothesis, except with the
equal sign struck-through, meaning that it does not equal 50%.

A random sample of 100 coin flips is taken, and the null hypothesis is then tested. If it is found
that the 100 coin flips were distributed as 40 heads and 60 tails, the analyst would assume that
a penny does not have a 50% chance of landing on heads and would reject the null hypothesis
and accept the alternative hypothesis.

If, on the other hand, there were 48 heads and 52 tails, then it is plausible that the coin could
be fair and still produce such a result. In cases such as this where the null hypothesis is
"accepted," the analyst states that the difference between the expected results (50 heads and
50 tails) and the observed results (48 heads and 52 tails) is "explainable by chance alone."

What is Hypothesis Testing?

Hypothesis testing refers to a process used by analysts to assess the plausibility of a hypothesis
by using sample data. In hypothesis testing, statisticians formulate two hypotheses: the null
hypothesis and the alternative hypothesis. A null hypothesis determines there is no difference
between two groups or conditions, while the alternative hypothesis determines that there is a
difference. Researchers evaluate the statistical significance of the test based on the probability
that the null hypothesis is true.

What are the Four Key Steps Involved in Hypothesis Testing?

Hypothesis testing begins with an analyst stating two hypotheses, with only one that can be
right. The analyst then formulates an analysis plan, which outlines how the data will be
evaluated. Next, they move to the testing phase and analyze the sample data. Finally, the
analyst analyzes the results and either rejects the null hypothesis or states that the null
hypothesis is plausible, given the data.

What are the Benefits of Hypothesis Testing?

Hypothesis testing helps assess the accuracy of new ideas or theories by testing them against
data. This allows researchers to determine whether the evidence supports their hypothesis,
helping to avoid false claims and conclusions. Hypothesis testing also provides a framework

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for decision-making based on data rather than personal opinions or biases. By relying on
statistical analysis, hypothesis testing helps to reduce the effects of chance and confounding
variables, providing a robust framework for making informed conclusions.

What are the Limitations of Hypothesis Testing?

Hypothesis testing relies exclusively on data and doesn’t provide a comprehensive

understanding of the subject being studied. Additionally, the accuracy of the results depends
on the quality of the available data and the statistical methods used. Inaccurate data or
inappropriate hypothesis formulation may lead to incorrect conclusions or failed tests.
Hypothesis testing can also lead to errors, such as analysts either accepting or rejecting a null
hypothesis when they shouldn’t have. These errors may result in false conclusions or missed
opportunities to identify significant patterns or relationships in the data.

The Bottom Line

Hypothesis testing refers to a statistical process that helps researchers and/or analysts
determine the reliability of a study. By using a well-formulated hypothesis and set of statistical
tests, individuals or businesses can make inferences about the population that they are
studying and draw conclusions based on the data presented. There are different types of
hypothesis testing, each with their own set of rules and procedures. However, all hypothesis
testing methods have the same four step process, which includes stating the hypotheses,
formulating an analysis plan, analyzing the sample data, and analyzing the result. Hypothesis
testing plays a vital part of the scientific process, helping to test assumptions and make better
data-based decisions.

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