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Review of Statistics
Statistical Inference
Hypothesis Testing
Type I Errors, Type II Errors, p-value (1 hr)
One-Tailed Test, Two-Tailed Test (2 hrs)
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Statistical inference
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Hypothesis testing
A statistical hypothesis test is a method of making statistical decisions from and about
experimental data
Null-hypothesis testing answers the question:
How well the findings fit the possibility that chance factors alone might be responsible"
Example: Does your score of 6/10 imply that I am a good teacher???
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Properties of point estimators
Linearity
Unbiasedness
Minimum Variance
Efficiency
Best Linear unbiased estimator (BLUE)
Consistency
Unbiased estimator: One or more values of an estimator is equal to the true value of a
parameter
Efficient estimator: Considering only the unbiased estimators of a parameter, the one which
has least variance is called the efficient estimator
Consistent estimator: The estimator which approaches the true value of its parameter as the
sample size increases
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Launching a niche course for MBA students?
Christos, brand manager for a leading financial training center, wants to introduce a new niche finance
course for MBA students. He met some industry stalwarts and found that with the skills acquired by
attending such a course, the students would be very hot in job market
He meets a random sample of 100 students and discovers the following characteristics of the market
Mean household income to $20,000
Interest level in students = high
Current knowledge of students for the niche concepts = low
Christos strongly believes the course would adequately profitable in students if they have the buying
power for the course. They would be able to afford the course only if the mean household income is
greater than $19,000
Would you advice Christos to introduce the course?
What should be the hypothesis?
Hint: What is the point at which the decision changes (19,000 or 20,000)?
What about the alternate hypothesis?
What other information do you need to ensure that the right decision is arrived at?
Hint: confidence intervals / significance levels?
Hint: Is there any other factor apart from mean, which is important? How do I move from population parameters
to standard errors?
What is the risk still remaining, when you take this decision?
Hint: Type-I / II errors?
Hint: P-value
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Identifying the critical sample Mean value Sampling distribution
To reach a final decision, Christos has to make a general inference (about the population)
from the sample data
Criterion: Mean income across all households in the market area under consideration
If the mean population household income is greater than $19,000, then Christos should introduce
the product line into the new market
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Christoss criterion for decision making
0.25
0.2
Critical Value (Xc)
0.15
0.1
0.05
$19,000
Sample mean values greater than $19,000--that is x-values on the right-hand side of the
sampling distribution centered on = $19,000--suggest that H0 may be false
More important the farther to the right x is , the stronger is the evidence against H0
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Computing the criterion value
Standard deviation for the sample of 100 households is $4,000. The standard error of the
mean (sx) is given by:
s
sx = = $400
n
Critical mean household income xc through the following two steps:
Determine the critical z-value, zc. For = 0.05:
zc = 1.645
Substitute the values of zc, s, and (under the assumption that H0 is "just" true )
xc = + zcs = $19,658
Decision Rule:
If the sample mean household income is greater than $19,658, reject the null hypothesis and
introduce the new course
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Test statistic
The value of the test statistic is simply the z-value corresponding to = $20,000
x 0.25
Z= = 2.5
sx
0.2
= 0.05
X c = + Zc *
0.15
0.1
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Errors in estimation
Please note:
Actual
You are inferring for a population, based only on a sample H0 is True H0 is False
This is no proof that your decision is correct Inference
Its just a hypothesis Correct Decision Type-II Error
There is still a chance that your inference is wrong H0 is True Confidence P(Type-II Error)
Level = 1- =
How do I quantify the prob. of error in inference?
Type-I Error
H0 is False Significance Power=1-
Type I and Type II Errors Level =
Type I error occurs if the null hypothesis is rejected
when it is true
Type II error occurs if the null hypothesis is not rejected
when it is false
Significance Level
-> Significance level
the upper-bound probability of a Type I error
1 - ->confidence level
the complement of significance level
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P-Value Actual significance level
P-value
The probability of obtaining an observed 0.25
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