1. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.1 Chapter 11 Introduction to Hypothesis Testing

2. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.2 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 H 0 : The defendant is innocent The alternative hypothesis or research hypothesis is H 1 : The defendant is guilty The jury does not know which hypothesis is true. They must make a decision on the basis of evidence presented.

3. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.3 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 don’t reject a false null hypothesis. That occurs when a guilty defendant is acquitted.

4. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.4 Nonstatistical Hypothesis Testing… The probability of a Type I error is denoted as α (Greek letter alpha). The probability of a type II error is β (Greek letter beta). The two probabilities are inversely related. Decreasing one increases the other.

5. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.5 Hypothesis Testing… The critical concepts are these: 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 reject the truth of the null hypothesis. 4. There are two possible decisions: Conclude there is enough evidence to reject the null hypothesis. [Conclude alternative hypothesis is true] Conclude there is not enough evidence to reject the null hypothesis. [Conclude null hypothesis is true]

6. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.6 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) = α P(Type II error) = β In practice, Type II errors are by far the most serious mistake because you go away believing the null is true and it is not true. Type I errors would allow you to conduct additional testing to verify conclusion.

7. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.7 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: H 0 : — the ‘null’ hypothesis H 1 : — the ‘alternative’ or ‘research’ hypothesis The null hypothesis (H 0 ) will always include “=“ [two tail test], “ ” [one tail test] pronounced H “nought”

8. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.8 Concepts of Hypothesis Testing… Consider a problem dealing with the mean demand for computers during assembly lead time. Rather than estimate the mean demand, our operations manager wants to know whether the mean is different from 350 units. We can rephrase this request into a test of the hypothesis: H 0 : = 350 Thus, our research hypothesis becomes: H 1 : ≠ 350 This is what we are interested in determining…

9. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.9 Concepts of Hypothesis Testing (2)… The testing procedure begins with the assumption that the null hypothesis is true. Thus, until we have further statistical evidence, we will assume: H 0 : = 350 (assumed to be TRUE)

10. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.10 Concepts of Hypothesis Testing (3)… The goal of the process is to determine whether there is enough evidence to infer that the null hypothesis is most likely not true and consequently the alternative hypothesis then must be true. That is, is there sufficient statistical information to determine if this statement: H 1 : ≠ 350, is true?

11. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.11 Concepts of Hypothesis Testing (4)… There are two possible decisions that can be made:  Conclude that there is enough evidence to reject the null hypothesis  Conclude that there is not enough evidence to reject the null hypothesis NOTE: we do not say that we accept the null hypothesis, although most people in industry will say this.

12. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.12 Concepts of Hypothesis Testing… Once the null and alternative hypotheses are stated, the next step is to randomly sample the population and calculate a test statistic (in this example, the sample mean). If the test statistic’s value is inconsistent with the null hypothesis we reject the null hypothesis and infer that the alternative hypothesis is true. For example, if we’re trying to decide whether the mean is not equal to 350, a large value of (say, 600) would provide enough evidence. If is close to 350 (say, 355) we could not say that this provides a great deal of evidence to infer that the population mean is different than 350. Is 355 really close??

13. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.13 Types of Errors… A Type I error occurs when we reject a true null hypothesis (i.e. Reject H 0 when it is TRUE) A Type II error occurs when we don’t reject a false null hypothesis (i.e. Do NOT reject H 0 when it is FALSE) H0H0 TF Reject I II

14. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.14 Types of Errors… Back to our example, we would commit a Type I error if: Reject H 0 when it is TRUE We reject H 0 ( = 350) in favor of H 1 ( ≠ 350) when in fact the real value of is 350. We would commit a Type II error in the case where: Do NOT reject H 0 when it is FALSE We believe H 0 is correct ( = 350), when in fact the real value of is something other than 350.

15. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.15 Recap I… 1) Two hypotheses: H 0 & H 1 2) ASSUME H 0 is TRUE 3) GOAL: determine if there is enough evidence to infer that H 1 is TRUE 4) Two possible decisions: Reject H 0 in favor of H 1 NOT Reject H 0 in favor of H 1 5) Two possible types of errors: Type I: reject a true H 0 [P(Type I)= ] Type II: not reject a false H 0 [P(Type II)= ]

16. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.16 Example 11.1… A department store manager determines that a new billing system will be cost-effective only if the mean monthly account is more than $170. [One tail test] A random sample of 400 [n] monthly accounts is drawn, for which the sample mean is $178 [X-bar]. The accounts are approximately normally distributed with a standard deviation of $65 [Sigma]. Can we conclude that the new system will be cost-effective?

17. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.17 Example 11.1… The system will be cost effective if the mean account balance for all customers is greater than $170. We express this belief as a our research hypothesis, that is: H 1 : > 170 (this is what we want to determine) Thus, our null hypothesis becomes: H 0 : < 170 (we use the “=“ part to conduct the test) Some people will leave the less than part off of the null hypothesis.

18. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.18 Example 11.1… What we want to show: H 1 : > 170 H 0 : < 170 (we’ll assume the = is true) We know: n = 400, = 178, and = 65 What to do next?! Determine sampling distribution of X-bar.

19. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.19 Example 11.1… To test our hypotheses, we can use two different approaches: The rejection region approach based on sampling distribution of X-bar (typically used when computing statistics manually), and The p-value approach (which is generally used with a computer and statistical software and also based on the sampling distribution of X-bar). We will explore both …

20. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.20 Example 11.1… Rejection Region…[Based on sampling distribution of X-bar] The rejection region is a range of values such that if the test statistic falls into that range, we decide to reject the null hypothesis in favor of the alternative hypothesis. is the critical value of to reject H 0.

21. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.21 Example 11.1… 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 >. Normally stated as “if X- bar is greater than the critical value”. = P( > ) is also… = P(rejecting H 0 given that H 0 is true) = P(Type I error)

22. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.22 Example 11.1… All that’s left to do is calculate and compare it to 170. Solve for the upper critical value. [175.34] Since our sample mean (178) is greater than the critical value we calculated (175.34), we reject the null hypothesis in favor of H 1

23. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.23 Example 11.1… The Big Picture… =175.34 =178 H 1 : > 170 H 0 : = 170 Reject H 0 in favor of

24. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.24 Standardized Test Statistic… An easier method is to use the standardized test statistic: and compare its result to : (rejection region: z > ) Since z = 2.46 > 1.645 (z.05 ), we reject H 0 in favor of H 1 …

25. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.25 p-Value 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. 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? p-value

26. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.26 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 H 1 : > 170.

27. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.27 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, we do not reject the null hypothesis. Since p-value =.0069 < =.05, we reject H 0 in favor of H 1

28. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.28 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. Remember: The alternative hypothesis is the more important one. It represents what we are investigating.

29. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.29 Chapter-Opening Example… The objective of the study is to draw a conclusion about the mean payment period. Thus, the parameter to be tested is the population mean. We want to know whether there is enough statistical evidence to show that the population mean is less than 22 days. Thus, the alternative hypothesis is H 1 :μ < 22 The null hypothesis is H 0 :μ > 22

30. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.30 Chapter-Opening Example… The [standardized]test statistic is We wish to reject the null hypothesis in favor of the alternative only if the sample mean and hence the value of the test statistic is small enough. As a result we locate the rejection region in the left tail of the sampling distribution. We set the significance level at alpha =.10 or 10%.

31. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.31 Chapter-Opening Example… Rejection region: From the data in SSA we computeSSA and p-value = P(Z < -.91) =.5 -.3186 =.1814

32. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.32 Chapter-Opening Example… Conclusion: Since -.91 > -1.28, there is not enough evidence to infer that the mean is less than 22 at a 10% level of significance. [reason, conclusion, level of significance] There is not enough evidence to infer that the plan will be profitable.

33. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.33 One– and Two–Tail Testing…

34. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.34 Example 11.2… AT&T’s argues that its rates are such that customers won’t see a difference in their phone bills between them and their competitors. They calculate the mean and standard deviation for all their customers at $17.09 and $3.87 (respectively). These are assumed to be the values of the population parameters [mean and standard deviation] You don’t believe them, so you sample 100 customers at random and calculate a monthly phone bill based on competitor’s rates. What we want to show is whether or not: H 1 : ≠ 17.09. We do this by assuming that: H 0 : = 17.09

35. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.35 Example 11.2… At a 5% significance level (i.e. =.05), we have /2 =.025. Thus, z.025 = 1.96 and our rejection region is: z 1.96 z -z.025 +z.025 0

36. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.36 Example 11.2… From the data, we calculate = 17.55data Using our standardized test statistic: We find that: Since z = 1.19 is not greater than 1.96, nor less than –1.96 we cannot reject the null hypothesis in favor of H 1. That is “there is insufficient evidence to infer that there is a difference between the bills of AT&T and the competitor.” Does not mean that you have proven that “the true mean is $17.09”.

37. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.37 Summary of One- and Two-Tail Tests… One-Tail Test (left tail) Two-Tail TestOne-Tail Test (right tail)

38. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.38 Example 11.1 - Calculating P(Type II errors)… Our original hypothesis… our new assumption…

39. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.39 Effects on of Changing Decreasing the significance level, increases the value of and vice versa. Consider this diagram again. Shifting the critical value line to the right (to decrease ) will mean a larger area under the lower curve for … (and vice versa)

40. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.40 Judging the Test… A statistical test of hypothesis is effectively defined by the significance level ( ) and the sample size (n), both of which are selected by the statistics practitioner. Therefore, if the probability of a Type II error ( ) is judged to be too large, we can reduce it by increasing, and/or increasing the sample size, n.

41. Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc. 11.41 Judging the Test… The power of a test is defined as 1–. It represents the probability of rejecting the null hypothesis when it is false [the true mean is some value other than that specified by the null hypothesis]. I.e. when more than one test can be performed in a given situation, its is preferable to use the test that is correct more often. If one test has a higher power than a second test, the first test is said to be more powerful and the preferred test.