Statistics for Business Decision

Lecture 8: Analysis of Variance

Master of Management
Faculty of Economics and Business
Universitas Gadjah Mada

2019
Tests of Hypothesis II
F Distribution

Analysis of Variance

Two-Way Analysis of Variance

Rationale
We expand our idea of hypothesis tests:

We describe (1) a test for variances and then a (2) test that
simultaneously compares several means to determine if they
came from equal populations.
Characteristics of the F Distribution
There is a family of F distributions. Each time the degrees of
freedom in either the numerator or the denominator change, a
new distribution is created.

▪ The F distribution is continuous

▪ The F statistic cannot be negative
▪ The F distribution is positively skewed
▪ The F distribution is asymptotic
Comparing Two Population Variances
▪ The value of F is computed using the following equation:

The larger of the two sample variances is placed in the numerator, forcing
the ratio to be at least 1.00
▪ We calculate the standard deviation, 𝑠, and square the
standard deviations to get the variance, 𝑠 2 , for each
population
Comparing Two Population Variances
Example:
A health services corporation manages two hospitals in Knoxville:
St. Mary’s North and St. Mary’s South.
The mean waiting time in both Emergency Departments is 42
minutes.
The hospital administrator believes St. Mary’s North has more
variation than St. Mary’s South.
Compare Two Population Variances Example
Lammers Limos offers limousine service
from Government Center in downtown
Toledo, Ohio, to Metro Airport in Detroit.
The president of the company is
considering two routes: via U.S. 25 and
via Interstate-75.
He wants to study the time it takes to get
to the airport using each route and
compare the results.
He collected the following sample data.
Compare Two Population Variances Example
Using the .10 significance level, is there a difference in the
variation in the driving times for the two routes?
Compare Two Population Variances Example
Using the .10 significance level, is there a difference in the
variation in the driving times for the two routes?
▪ Step 1: State the null and alternate hypothesis
𝐻0 : 𝜎12 = 𝜎22
𝐻1 : 𝜎12 ≠ 𝜎22

▪ Step 2: Select the level of significance, we decide to use .10

Compare Two Population Variances Example
Using the .10 significance level, is there a difference in the
variation in the driving times for the two routes?

▪ Step 3: Determine the

test statistic, we’ll use F
▪ Step 4: State the
decision rule, reject 𝐻0 if
the ratio of the sample
variances > 3.87
Compare Two Population Variances Example
Using the .10 significance level, is there a difference in the
variation in the driving times for the two routes?
▪ Step 5: Compute the ratio of the two sample variances:

It’s 4.23 so we reject 𝐻0

▪ Step 6: We conclude there is a difference in the variation in
the time to travel the two routes.
Tests of Hypothesis II
F Distribution

Analysis of Variance

Two-Way Analysis of Variance

ANOVA: Analysis of Variance
▪ A one-way ANOVA is used to compare two or more treatment
means.
▪ ANOVA was first developed for use in agriculture; the term
treatment was used to identify how different plots of land were
treated with different fertilizers. A treatment is a source of
variation.
ANOVA: Analysis of Variance
The assumptions underlying ANOVA are
▪ The samples are from populations that follow the normal
distribution
▪ The populations have equal standard deviations
▪ The populations are independent
ANOVA Example
▪ Joyce Kuhlman manages a
regional financial center. Wolfe White Korosa
▪ She wishes to compare the 55 66 47
productivity, as measured by the 54 76 51
number of customers served, 59 67 46
among three employees.
56 71 48
▪ Four days are randomly selected
and the number of customers
served by each employee is
recorded.
ANOVA Example
Is there a difference in the mean number of customers served?
ANOVA Example

Is there a difference in the mean number of customers

served?
1. First step: Find the overall mean of the 12 observations.
It is 58.
2. Second step: Find the difference between each particular value and the
overall mean.
Square these differences and sum up. This result is the total variation,
here 1,082.
ANOVA Example

Is there a difference in the mean number of customers

served?
3. Third step: break this total variation in two components:
a) Variation due to treatment variation
b) Random variation.
ANOVA Example

Is there a difference in the mean number of customers

served?
3. Third step: break this total variation in two components:
a) Variation due to treatment variation
The variation due to treatments:
4(56 − 58)2 + 4(70 − 58)2 + 4(48 − 58)2 = 992
It is found by squaring the difference between each treatment mean and the overall
mean and then multiplying each squared difference by the number of observations
in each treatment.
ANOVA Example

Is there a difference in the mean number of customers

served?
3. Third step: break this total variation in two components:
b) Random variation
The random variation:
(55 − 56)2 +(54 − 56)2 + ⋯ + (48 − 48)2 = 90
It is found by summing the squared differences between each value and the mean
for each treatment.
ANOVA Example

Is there a difference in the mean number of customers

served?
4. Fourth step: Calculate the test statistic, F
(992/2)
𝐹 = = 49.6
(90/9)
This ratio is quite different from 1, we can conclude there is a difference in the mean
number of customers served by the three employees.
Finding the Value of F
The formula for the sum of the squares total, SS total is

The formula for the sum of the squares error, SSE is

Finding the Value of F
The formula for the sum of the squares treatment, SST is

This information is summarized in the ANOVA table

Finding the Value of F Example
▪ A group of four airlines hired Brunner Marketing Research Inc.
to survey passengers regarding their level of satisfaction with a
recent flight.
▪ Twenty-five questions offered a range of possible answers:
excellent (4), good (3), fair (2), poor (1), so the highest
possible score was 100.
▪ Brunner randomly selected and surveyed passengers from the
four airlines.
▪ Is there a difference in the mean satisfaction level among the
four airlines?
Finding the Value of F Example
Is there a difference in the mean satisfaction level among the four
airlines?
▪ Step 1: State the null hypothesis and alternate hypothesis.
𝐻0 : μ𝑁 = μ𝑊 = μ𝑃 = μ𝐵
𝐻1 : The mean scores are not all equal

▪ Step 2: Select the level of significance, we’ll use .01

Finding the Value of F Example
Is there a difference in the mean satisfaction level among the four
airlines?
▪ Step 3: Determine the test statistic, the test statistic follows
the F distribution
▪ Step 4: Formulate the decision rule, reject H0 is F > 5.09
Finding the Value of F Example
Is there a difference in the mean satisfaction level among the four
airlines?
▪ Step 5: Select the sample, calculate F (8.99), and make a decision, we
reject H0

▪ Step 6: Interpret the result, we conclude the populations are not all equal
Pairs of Means
If a null hypothesis of equal treatment means is rejected, we can identify the
pairs of means that differ with the following confidence interval

If the confidence interval includes zero, there is not a difference between the
treatment means
Pairs of Means Analysis Example
▪ Recall in the previous example of airline
satisfaction, we rejected the null hypothesis
that the population means were equal; at
least one of the airline’s mean level of
satisfaction is different from the others. But
we do not know which pairs.

▪ Use formula 12-5 to construct a confidence

interval with the mean scores of Northern
and Branson. Using a 95% level of
confidence, we find the endpoints are
10.457 and 26.043.

▪ Zero is not in the interval; so passengers

on Northern rated service significantly
different from those on Branson Airlines
Tests of Hypothesis II
F Distribution

Analysis of Variance

Two-Way Analysis of Variance

A Two-Way ANOVA
▪ In a two-way ANOVA, we consider a second treatment variable (the
blocking variable)
▪ The second treatment variable reduces the amount of error variance
▪ The second treatment variable is determined using equation (12-6) below

▪ The SSE term, or sum of squares error, is found with the following
equation
ANOVA Test Example
▪ WARTA, the Warren Area Regional Transit Authority, is expanding bus service from the
suburb of Starbrick to the business district of Warren. There are four routes being
considered, U.S. 6, West End, Hickory St. , and Rte. 59.
▪ WARTA conducted tests to determine whether there is a difference in the mean travel
times along the four routes; each driver drove each route.
ANOVA Test Example
Questions
▪ At the .05 significance level, is there a difference in the mean travel time
along the four routes?
▪ If we remove the effects of the drivers, is there a difference in the mean
travel time?
ANOVA Test Example
▪ Step 1: State the null and alternate hypothesis
𝐻0 : 𝜇2 = 𝜇3 = 𝜇1 = 𝜇1
𝐻1 : 𝑁𝑜𝑡 𝑎𝑙𝑙 𝑡𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡 𝑚𝑒𝑎𝑛𝑠 𝑎𝑟𝑒 𝑡ℎ𝑒 𝑠𝑎𝑚𝑒
▪ Step 2: Select the level of significance, we decide to use .05
▪ Step 3: Select the test statistic, we use F
▪ Step 4: State the decision rule, Reject H0 if F > 3.24
▪ Step 5: Make decision, F = 2.483, we do not reject the null hypothesis
▪ Step 6: Interpret, there is no reason to conclude that any one of the
routes is faster than any other.
ANOVA Test Example
▪ Step 5: Make decision, F = 2.483, we do not reject the null hypothesis

▪ Step 6: Interpret, there is no reason to conclude that any one of the

routes is faster than any other.
The Blocking Variable
▪ In the WARTA example, we only considered the variation due to routes
and took all other variables to be random
▪ Now, we’ll include the variance due to the drivers by letting the drivers be
the blocking variable
BLOCKING VARIABLE A second treatment variable that when included in the
ANOVA analysis will have the effect of reducing the SSE term.

▪ To do so, requires that we calculate the SSB, the sum of the squares due
to blocks
Two-Way Analysis of Variance
Including the variance of the drivers, here is a table of the drivers
respective means with an overall mean of 22.8 minutes.
Two-Way Analysis of Variance
Including the variance of the drivers, here is a table of the drivers
respective means with an overall mean of 22.8 minutes.
Substituting this information in formula 12-6, we determine SSB is 119.7
SSB = kΣ(തxb – xതG)2
= 4(19.5 – 22.8)2 + 4(21.0 – 22.8)2 + 4(22.5 – 22.8)2 + 4(24.75 –22.8)2 +4(26.25 – 22.8)2
= 119.7
Then use formula 12-7 to find SSE
SSE = SS total – SST – SSB
= 229.2 – 72.8 – 119.7
= 36.7
A Second Treatment Variable Continued
Determine the F statistics for the treatment variable and the blocking variable from the
following ANOVA table
Hypothesis Test of Equal Block Means
▪ Step 1: State the null and alternate hypothesis
𝐻0 : 𝜇2 = 𝜇3 = 𝜇1 = 𝜇1
𝐻1 : 𝑁𝑜𝑡 𝑎𝑙𝑙 𝑡𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡 𝑚𝑒𝑎𝑛𝑠 𝑎𝑟𝑒 𝑡ℎ𝑒 𝑠𝑎𝑚𝑒
▪ Step 2: Select the level of significance, we decide to use .05
▪ Step 3: Select the test statistic, we use F
▪ Step 4: State the decision rule, Reject H0 if F > 3.24
▪ Step 5: Make decision, F = 2.483, we do not reject the null hypothesis
▪ Step 6: Interpret, there is no reason to conclude that any one of the
routes is faster than any other.
Hypothesis Test of Equal Block Means
Next, we test to find if the travel times for the various drivers are equal.
▪ State the decision rule for the second set of hypotheses, reject 𝐻0 if F > 3.26
▪ Make a decision, the computed F ratio is 9.78 so we reject the null hypothesis
𝑀𝑆𝐵 29.93
𝐹= = = 9.78
𝑀𝑆𝐸 3.06
▪ Interpret, we conclude at least one driver’s mean travel time is different from
the others. WARTA management can conclude, based on the sample results,
that there is a difference in the mean travel times of drivers.
Interaction Plot
▪ An interaction plot illustrates the interaction of the two factors,
route and driver
▪ Travel time is the response variable

INTERACTION The effect of one factor on a response variable differs

depending on the value of another factor.
Interaction Plot

Routes
Drivers U.S. 6 West End Hickory Rte. 59
Deans 18 17 21 22
Snaverly 16 22.33 23 22
Ormson 18 23 26 22
Zollaco 23 22 29 23.67
Filbeck 25 24 28 28
Hypothesis Tests for Interaction

The next step is to investigate the interaction effects

▪ Is there an interaction between drivers and routes?
▪ Are the mean travel times for drivers the same?
▪ Are the mean travel times for the routes the same?
Hypothesis Tests for Interaction
Test three sets of hypotheses
𝐻0 : There is no interaction between drivers and routes
𝐻1 : There is interaction between drivers and routes

𝐻0 : The driver means are equal

𝐻1 : At least one driver travel time mean is different

𝐻0 : The route means are equal

𝐻1 : At least one route travel time mean is different
ANOVA Table including Interactions
The complete ANOVA table including interactions
A One-Way ANOVA to Test a Hypothesis
We will continue the analysis by
conducting a one-way ANOVA for
each route by testing the hypothesis

𝐻0 : Driver times are equal

The results show there are significant

differences in the mean travel times
among the drivers for every route,
except Route 59 which has a p-value
of .06.
THANK YOU