Statistical Inference

Hypothesis testing is the second form of statistical inference. It also has greater applicability.

Hypothesis Testing

To understand the concepts well start with an example of nonstatistical hypothesis testing.

Nonstatistical Hypothesis Testing

A criminal trial is an example of hypothesis testing without the statistics.
In a trial a jury must decide between two hypotheses. The null hypothesis is H0: The defendant is innocent The alternative hypothesis or research hypothesis is H1: The defendant is guilty The jury does not know which hypothesis is true. They must make a decision on the basis of evidence presented.

Nonstatistical Hypothesis Testing

In the language of statistics convicting the defendant is called rejecting the null hypothesis in favor of the alternative hypothesis. That is, the jury is saying that there is enough evidence to conclude that the defendant is guilty (i.e., there is enough evidence to support the alternative hypothesis).

Nonstatistical Hypothesis Testing

If the jury acquits it is stating that there is not enough evidence to support the alternative hypothesis. Notice that the jury is not saying that the defendant is innocent, only that there is not enough evidence to support the alternative hypothesis. That is why we never say that we accept the null hypothesis.

Nonstatistical Hypothesis Testing

There are two possible errors. A Type I error occurs when we reject a true null hypothesis. That is, a Type I error occurs when the jury convicts an innocent person. A Type II error occurs when we dont reject a false null hypothesis. That occurs when a guilty defendant is acquitted.

Nonstatistical Hypothesis Testing

The probability of a Type I error is denoted as (Greek letter alpha). The probability of a type II error is (Greek letter beta). The two probabilities are inversely related. Decreasing one increases the other.

Nonstatistical Hypothesis Testing

In our judicial system Type I errors are regarded as more serious. We try to avoid convicting innocent people. We are more willing to acquit guilty people. We arrange to make small by requiring the prosecution to prove its case and instructing the jury to find the defendant guilty only if there is evidence beyond a reasonable doubt.

Nonstatistical Hypothesis Testing

The critical concepts are theses: 1. There are two hypotheses, the null and the alternative hypotheses. 2. The procedure begins with the assumption that the null hypothesis is true. 3. The goal is to determine whether there is enough evidence to infer that the alternative hypothesis is true. 4. There are two possible decisions: Conclude that there is enough evidence to support the alternative hypothesis. Conclude that there is not enough evidence to support the alternative hypothesis.

Nonstatistical Hypothesis Testing

5. Two possible errors can be made. Type I error: Reject a true null hypothesis Type II error: Do not reject a false null hypothesis. P(Type I error) = P(Type II error) =

Concepts of Hypothesis Testing (1)

There are two hypotheses. One is called the null hypothesis and the other the alternative or research hypothesis. The usual notation is:
pronounced H nought

H0: the null hypothesis H1: the alternative or research hypothesis

Summary of One- and Two-Tail Tests

Example .1
The manager of a department store is thinking about establishing a new billing system for the store's credit customers.

One-Tail Test (left tail)

Two-Tail Test

One-Tail Test (right tail)

She determines that the new system will be cost-effective only if the mean monthly account is more than $170. A random sample of 400 monthly accounts is drawn, for which the sample mean is $178. The manager knows that the accounts are approximately normally distributed with a standard deviation of $65. Can the manager conclude from this that the new system will be costeffective?

Example .1

IDENTIFY

Example .1

IDENTIFY

The system will be cost effective if the mean account balance for all customers is greater than $170. Thus, our null hypothesis becomes: H0: = 170 (this specifies a single value for the parameter of interest) We express this belief as our research hypothesis, that is: H1: > 170 (this is what we want to determine)

What we want to show: H0: = 170 (well assume this is true) H1: > 170

We know: n = 400, = 178, and = 65

What to do next?!

Example .1

COMPUTE

Example .1 Rejection region

COMPUTE

To test our hypotheses, we can use two different approaches: The rejection region approach (typically used when computing statistics manually), and The p-value approach (which is generally used with a computer and statistical software). We will explore both in turn

It seems reasonable to reject the null hypothesis in favor of the alternative if the value of the sample mean is large relative to 170, that is if > .
= P(Type I error) = P( reject H0 given that H0 is true) = P( > )

Example .1
All thats left to do is calculate

COMPUTE

Standardized Test Statistic

An easier method is to use the standardized test statistic:

and compare it to 170.

and compare its result to :

( rejection region: z > )

we can calculate this based on any level of significance ( ) we want

Since z = 2.46 > 1.645 (z.05), we reject H0 in favor of H1

Example .1 The Big Picture Again

p-Value of a Test
The p-value of a test is the probability of observing a test statistic at least as extreme as the one computed given that the null hypothesis is true.
.05

H0: = 170 H1: > 170

In the case of our department store example, what is the probability of observing a sample mean at least as extreme as the one already observed (i.e. = 178), given that the null hypothesis (H0: = 170) is true?

Z.05=1.645 z = 2.46
p-value

Reject H0 in favor of

P-Value of a Test
p-value = P(Z > 2.46)

Interpreting the p-value

The smaller the p-value, the more statistical evidence exists to support the alternative hypothesis. If the p-value is less than 1%, there is overwhelming evidence that supports the alternative hypothesis. If the p-value is between 1% and 5%, there is a strong evidence that supports the alternative hypothesis. If the p-value is between 5% and 10% there is a weak evidence that supports the alternative hypothesis. If the p-value exceeds 10%, there is no evidence that supports the alternative hypothesis. We observe a p-value of .0069, hence there is overwhelming evidence to support H1: > 170.

p-value =.0069

z =2.46

Interpreting the p-value

Overwhelming Evidence (Highly Significant) Strong Evidence (Significant) Weak Evidence (Not Significant) No Evidence (Not Significant) 0 p=.0069 .01 .05 .10

Interpreting the p-value

Compare the p-value with the selected value of the significance level:

If the p-value is less than , we judge the p-value to be small enough to reject the null hypothesis.
If the p-value is greater than hypothesis. Since p-value = .0069 , we do not reject the null

<= .05, we reject H0 in favor of H1

Conclusions of a Test of Hypothesis

If we reject the null hypothesis, we conclude that there is enough evidence to infer that the alternative hypothesis is true. If we do not reject the null hypothesis, we conclude that there is not enough statistical evidence to infer that the alternative hypothesis is true.

Developing an Understanding of Statistical Concepts

As is the case with the confidence interval estimator, the test of hypothesis is based on the sampling distribution of the sample statistic. The result of a test of hypothesis is a probability statement about the sample statistic. We assume that the population mean is specified by the null hypothesis.

Remember: The alternative hypothesis is the more important one. It represents what we are investigating.

Developing an Understanding of Statistical Concepts

We then compute the test statistic and determine how likely it is to observe this large (or small) a value when the null hypothesis is true. If the probability is small we conclude that the assumption that the null hypothesis is true is unfounded and we reject it.