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Hypothesis Testing

Concept of hypothesis
• A hypothesis is a proposition which the
researcher wants to verify
• In a problem research it is necessary to
formulate a hypothesis.
Procedure of hypothesis testing
• Formulate a hypothesis
• Set up a suitable significance level
• Choose a test criterion
• Compute
• Make decisions
Formulate a hypothesis

• The conventional approach to hypothesis testing


is to set up 2 hypotheses instead of one in such
a way that if one is false or rejected, the other is
true or accepted.
• Let us consider that the average income of
population is Rs.9000
• H : µ = Rs. 9000 where H is the null hypothesis
0 0

• The alternate hypothesis is H :µ ≠ Rs.9000


A
Set up a suitable significance level
• Having formulated the hypothesis , the next step
is to test its validity at a certain level of
significance.
• The confidence with which a hypothesis is
accepted or rejected depends upon the
significance level used for this purpose
• A significance level of say 5% means that
means that in long run, the researcher is likely to
be wrong in accepting a false hypothesis and
rejecting a true hypothesis in 5 out of 100
occasions.
Select test criterion
• The next step in testing the hypothesis is
selecting an appropriate statistical
technique as the test criterion
• When the hypothesis pertains to a large
sample Z- test implying the normal
distribution is used
• When the sample size is small, t-test will
become more suitable
Compute
• After having selected the statistical
technique, the next is performance of
different computations
• These computations include the testing
statistic as also its standard error
Make decisions
• The last step includes drawing a statistical
decision involving the acceptance or
rejection of the null hypothesis
• Statement rejecting the hypothesis is
much stronger than that accepting it
Two types errors in hypothesis testing

• When a hypothesis is tested, there are four


possibilities
– The hypothesis is true but our test leads to its
rejection
– The hypothesis is false but the test leads to its
acceptance
– The hypothesis is true and the test leads to its
acceptance
– The hypothesis is false and the test leads to its
rejection
Decision H0 is true (S1) H0 is false (S2)

Accept H0 Correct Type II


(A1) decision error(β)
Reject H0 Type I error Correct
(A2) (α) decision
• When (α) =0.10 it means that the true hypothesis
will be accepted in 90 out of every 100 occasions.
Example
• A business firm wants to introduce another
product in the market. Thus it has to choose one
of the two decisions: whether to introduce the
product or not.
• Now the states of nature are two : the product
fails, the product succeeds.
• The firm thus runs the risk of wrong decision
making in two ways:
– The company doesn’t launch the product though it
would have succeeded if it was launched. This is type
II error (β)
– The company launches the product and then it fails.
This is type I error(α)
Parametric and non-parametric tests
• The parametric tests assume that
parameters such as mean , standard
deviation etc. exist and are used in testing
the hypothesis.
• The underlying assumption in such tests
the source of data is normally distributed.
• The parametric tests which are commonly
used are:
• Z-Test, t-test, F-test
One tail test
• A characteristic of this test is that alternative
hypothesis is one-sided.
• For example if H : µ = 50
O

• It can be H : µ > 50 , called the right tail test


1

• H : µ < 50, it is called the left tail test


1

• Another characteristic of one sided test is that


the alternative hypothesis includes a series of
hypothesis
H1: µ = 51
H1: µ = 52
H1: µ = 53……..
• Such an alternative hypothesis is called the
composite hypothesis.
Interpreting the significance level

• The purpose of hypothesis testing is not to


question the computed value of sample
statistic , but to make a judgment about
difference between the sample statistic
and a hypothesized population parameter
• Next step is to decide what criterion to use
for deciding whether to accept or reject the
null hypothesis.
• If we assume that the hypothesis is correct
the significance level will indicate the
percentage of sample mean that is outside
the certain limits
• The confidence levels indicate the
percentage of sample mean that is outside
certain limits
0.025 of the area 0.95 of the area 0.025 of the area

In these two regions there is a significant difference between the sample statistic and the hypothesized population parameter

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