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Hypothesis Testing

By: Chanchal Agarwal

Meaning of Hypothesis
A Hypothesis is the statement or an assumption about relationships between variables. or

A Hypothesis is a tentative explanation for certain behaviors, phenomenon or events that have occurred or will occur

Interesting Hypothesis
Bankers assumed high-income earners are more profitable than low-income earners. Old clients were more likely to diminish CD balances by large amounts compared to younger clients. This was nonintrusive because conventional wisdom suggested that older clients have a larger portfolio of assets and seek less risky investments

Basic Concepts of Hypothesis


1. Null Hypothesis and Alternative Hypothesis 2. The Level of Significance 3. Type I and Type II Errors

1. Null Hypothesis and Alternative Hypothesis


In the context of statistical analysis: If we are to compare Method A with Method B about its superiority and if we proceed on the assumption that both methods are equally good, then this assumption is termed as the Null Hypothesis As against the above, we may think that the Method A is superior or that the Method B is inferior, we are then stating what is termed as Alternative Hypothesis

Null Hypothesis and Alternative Hypothesis


Alternative Hypothesis is usually the one which we wish to prove and the Null hypothesis is the one which we wish to disprove Thus, a null hypothesis represents the hypothesis we are trying to reject, and the alternative hypothesis represents all other possibilities

2. The Level of Significance


In the context of hypothesis-testing, the level of significance is an important concept It is always some percentage (usually 5%) This implies that the null hypothesis will be rejected, when the sampling result (observed evidence) has less than 0.05 probability of occurring if the null hypothesis is true That is, the 5% level of significance means that the researcher is willing to take as much as a 5% risk of rejecting the null hypothesis when it happens to be true

3. Type I and Type II Errors


Basically two types of errors are possible: Type I Error we may reject the null hypothesis when it is true; and Type II Error we may accept the null hypothesis when in fact the null hypothesis is not true That is, Type I error means rejection of the hypothesis which should have been accepted and Type II error means accepting the hypothesis which should have been rejected

Steps in Hypothesis-testing
To test a hypothesis means to state (on the basis of data the researcher has collected) whether or not the hypothesis seems valid In hypothesis testing the main question is whether to accept the null hypothesis or not to accept the null hypothesis? Steps for hypothesis testing refer to all the steps we take for making a choice between rejection and acceptance of the null hypothesis

Steps in Hypothesis-testing
1. 2. 3. 4. 5. 6. Making a formal statement Selecting a significance level Deciding the distribution to use Selecting a random sample Calculation of the probability Comparing the probability

Making a Formal Statement


Consists in making a formal statement of the null hypothesis and also the alternative hypothesis Ex: The average score in an aptitude test at the national level is 80. To evaluate a states education system, the average score of 100 of the states students selected on random basis is 75. The state wants to know if there is a significant difference between the states scores and the national scores. Hypothesis may be stated as follows: Null hypothesis: population mean = 80 Alternative hypothesis: population mean is not equal to 80

Selecting a Significance Level


The hypothesis are tested on predetermined level of significance and should be specified Generally, either 5% level (0.05) or 1% level (0.01) is adopted

Deciding the distribution to use


The next step is to determine the appropriate sampling distribution Generally, follow the principles of Normal Distribution

Selecting the Random Sample


Select the random sample and compute an appropriate value The sample should furnish the empirical data

Calculation of the Probability


The next step is to calculate the probability that the sample result would diverge as it has from expectations, if the null hypothesis were in fact true

Comparing the Probability


The next step is to compare the probability thus calculated with the specified value (the significance level) If the calculated probability is equal to or smaller than the significance level, then reject the null hypothesis (i.e. accept the alternative hypothesis); but if the calculated probability is greater, then accept the null hypothesis

Statistical Tests of Hypothesis


Tests of hypothesis are also known as tests of significance They are classified as: 1. Parametric Tests or Standard Tests ex. are z-test, t-test, F-test etc. and are based on the assumption of normality 2. Non-Parametric Tests or Distribution-free tests of hypothesis

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