Business Analytics: Methods, Models,

and Decisions, 1st edition

James R. Evans

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Copyright © 2013 Pearson Education, Inc.
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 Hypothesis Testing
 One-Sample Hypothesis Tests
 Two-Sample Hypothesis Tests
 Analysis of Variance
 Chi-Square Test for Independence

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 Involves drawing inferences about two contrasting
propositions (each called a hypothesis) relating to
the value of one or more population parameters.
 H0 Null hypothesis: describes an existing theory
 H1 Alternative hypothesis: the complement of H0
 Using sample data, we either:
- reject H0 and conclude the sample data provides
sufficient evidence to support H1, or
- fail to reject H0 and conclude the sample data
does not support H1.

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Example 7.1
A Legal Analogy for Hypothesis Testing
 In the U.S. legal system, a defendant is innocent
until proven guilty.
 H0: Innocent
 H1: Guilty
 If evidence (sample data) strongly indicates the
defendant is guilty, then we reject H0.
 Note that we have not proven guilt or innocence!

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Steps of hypothesis testing procedures
1. Identify the population parameter and formulate
the hypotheses to test.
2. Select a level of significance (related to the risk of
drawing an incorrect conclusion).
3. Determine the decision rule on which to base a
conclusion.
4. Collect data and calculate a test statistic.
5. Apply the decision rule and draw a conclusion.

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Three forms:
1. H0: parameter = constant
H1: parameter ≠ constant
2. H0: parameter ≤ constant
H1: parameter > constant
3. H0: parameter ≥ constant
H1: parameter < constant
The equality part of the hypotheses sign is always in
the Null hypothesis.

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Example 7.2
Formulating a One-Sample Test of Hypothesis
 CadSoft believes the average response time for
technical support requests can be reduced to less
than 25 minutes.
 Set up the hypotheses.

H0: mean response time ≥ 25

H1: mean response time < 25

Figure 7.1

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Understanding Risk in Hypothesis Testing
We always risk drawing an incorrect conclusion.
Four outcomes are possible:
1. H0 is true and the test correctly fails to reject H0
2. H0 is false and the test correctly rejects H0
3. H0 is true and the test incorrectly rejects H0
4. H0 is false and the test incorrectly fails to reject H0
Outcome 3 is called a Type I error.
Outcome 4 is called a Type II error.

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Understanding Risk in Hypothesis Testing
The probability of making a Type I error = α
The probability of making a Type II error = β
 α = P( rejecting H0 | H0 is true)
β = P(not rejecting H0 | H0 is false)
The value of α can be controlled.
α is typically set to 0.01, 0.05, or 0.10.
The value of β cannot be specified in advance and
depends on the value of the (unknown) population
parameter.

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Example 7.3
How β Depends on the True Population Mean
 In the CadSoft example:
H0: mean response time ≥ 25
H1: mean response time < 25
 If the true mean was 15, then the sample mean
will most likely be less than 25.
 If the true mean is 24, then the sample mean may
or may not be less than 25.
 The further away the true mean is from the
hypothesized value, the smaller the value of β.
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Computing the test statistic
One-sample test on a mean,  known

One-sample test on a mean,  unknown

One-sample test on a proportion

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Example 7.4 Computing the Test Statistic
In the CadSoft example, sample data for 44
customers revealed a mean response time of
21.91 minutes and a sample standard deviation of
19.49 minutes.

t = -1.05 indicates that the sample mean of 21.91 is

1.05 standard errors below the hypothesized
mean of 25 minutes.

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Drawing Conclusions in a Two-tailed Test
H0: parameter = constant
H1: parameter ≠ constant

Figure 7.2a

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Drawing Conclusions in One-tailed tests

H0: parameter ≥ constant H0: parameter ≤ constant

H1: parameter < constant H1: parameter > constant

Figure 7.2b

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Example 7.5
Finding the Critical Value and Drawing a Conclusion
In the CadSoft example, suppose we set α = 0.05.
n = 44 H0: mean response time ≥ 25
df = n −1 = 43 H1: mean response time < 25

t = -1.05
Critical value = tα/2, n−1 = T.INV(1− α , n −1)
= T.INV(0.95, 43)
= 1.68

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Example 7.5 (continued)
Finding the Critical Value and Drawing a Conclusion
t = -1.05 does not fall in the rejection region.
Fail to reject H0.
Even though the sample
mean of 21.91 is well
below 25, we have too
much sampling error to
conclude the that the
true population mean is
Figure 7.3
less than 25 minutes.

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p-Values
 An alternative approach to Step 3 of any
hypothesis test (setting up a decision rule) uses
the p-value rather than the critical value.
 The p-value is the observed significance level.
 The p-value decision rule is to:
Reject H0 if the p-value < α

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Example 7.6 Using p-Values
 In the CadSoft example, the p-value is the left tail
area of the observed test statistic, t = -1.05.
 p-value =T.DIST(test statistic, df, true)
=TDIST(-1.05, 43, true)
= 0.1498
 Do not reject H0 because the:
p-value is not less than α
0.1498 is not less than 0.05

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Example 7.7 Conducting a Two-Tailed Hypothesis
Test for the Mean
Use the data set Vacation Survey to test whether the
average age of respondents is equal to 35.
Test at a 5% significance level.

Figure 7.4

For the 34 respondents we find a sample mean of

38.677 and sample standard deviation of 7.858.

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Example 7.7 (continued) Conducting a Two-Tailed
Hypothesis Test for the Mean
H0: mean age = 35
H1: mean age ≠ 35

Critical value = T.INV.2T(α, df) Figure 7.5

= T.INV.2T(.05, 33) = 2.0345

p-value = T.DIST.2T(2.69, 33) = 0.0111
Reject H0.

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Example 7.8 One-Sample Test for the Proportion
 CadSoft sampled 44 customers and asked them
to rate the overall quality of a software package.
 Sample data revealed that 35 respondents
thought the software was very good or excellent.
 In the past, 75% of customers fell into that
category.
 At the 5% significance level, test to see whether
the percentage of customers in that category is
now higher than 75%.

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Example 7.8 (continued)
One-Sample Test for the Proportion
H0: proportion < 0.75
H1: proportion ≥ 0.75

Critical value = NORM.S.INV(0.95) = 1.645

p-value = 1 − NORM.S.DIST(0.69, true) = 0.24
Do not reject H0.

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Two-Sample Hypothesis Tests Available
in Excel’s Analysis Toolpak

Table 7.1

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Example 7.9 Comparing Supplier Performance
Purchase Orders database
Set up a hypothesis test for determining if the mean
lead time for Alum Sheeting (µ1) is greater than
the mean lead time for Durrable Products (µ2).

Figure 7.6

7-25
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Example 7.9 (continued)
Comparing Supplier Performance

PivotTable shows:

Figure 7.7

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Excel’s Two-sample Hypothesis Tests on Means
 If the population variances are known, use:
z-Test: Two-Sample for Means
 If the population variances are unknown then, in
most situations, use:
t-Test: Two-Sample Assuming Unequal Variances
 If the population variances are unknown but
assumed to be equal, then use:
t-Test: Two-Sample Assuming Equal Variances

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Two-Sample Hypothesis Tests
Cautions when Interpreting Excel’s Two-sample
Hypothesis Test Output
• If the test statistic is negative, Excel’s one-tail p-
value is correct for a lower tail test. For an upper
tail test, subtract the reported p-value from 1
• The reverse is true when the test statistic is non-
negative
• The critical value reported in Excel should be
multiplied by -1 if

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Example 7.10 Testing the Hypothesis for Supplier
Lead-Time Performance
Data
Data Analysis
t-Test: Two-Sample
Assuming Unequal
Variances
Figure 7.8

Variable 1 Range: Alum Sheeting data

Variable 2 Range: Durrable Products data

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Example 7.10 (continued) Testing the Hypothesis
for Supplier Lead-Time Performance

t = 3.83
Critical value = 1.81
p-value = 0.00166
Reject H0.
Figure 7.9

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Example 7.11
Using the Paired Two-Sample Test for Means
Use the Pile Foundation data to test for a difference
in the means of the estimated and actual pile
lengths.
Use a 5% significance level.
H0: μD = 0
H1: μD ≠ 0
where μD is the difference
between the 2 population
means.
Figure 7.10

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Example 7.11 (continued)
Using the Paired Two-Sample Test for Means
t-Test: Paired Two-Sample for Means

Figure 7.11

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Two-Sample Hypothesis Tests
Test for Equality of Variances
Understanding variation in business processes
is very important.
We can test for equal variability of two groups:

The ratio of two population variances follow an

F probability distribution.
The test statistic is

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Example 7.12
Applying the F-Test for Equality of Variances
Using α = 0.05, test for equal variances in the lead
times of Alum Sheeting and Durrable Products.

Figure 7.12

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ANOVA
 Used to compare the means of two or more
population groups.

 ANOVA derives its name from the fact that we are

analyzing variances in the data.
 ANOVA measures variation between groups
relative to variation within groups.
 Each of the population groups is assumed to
come from a normally distributed population.
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Example 7.13
Differences in Insurance Survey Data
Average health insurance satisfaction scores
(1-5 scale) by education level

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Example 7.14 Applying the Excel ANOVA Tool
(Insurance Survey data)
Data
Data Analysis
ANOVA: Single Factor
Input Range:
contiguous columns
of insurance
satisfaction data
H0: μ1 = μ2 = μ3 Figure 7.13

H1: at least one mean is different from the others

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Example 7.14 (continued)
Applying the Excel ANOVA Tool
Use α = 5%.
F > Fcrit
p-value
= 0.0356
Reject H0.

Figure 7.14

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 Test for independence of 2 categorical variables.
 Compute expected frequencies and compare to
the observed frequencies in the sample data.
 H0: two categorical variables are independent
H1: two categorical variables are dependent

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Example 7.15
Independence and Marketing Strategy
Using a 5% significance level test, determine
whether gender and brand preference for energy
drinks can be considered independent variables.

Figure 7.15
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Example 7.16 Computing Expected Frequencies

Cell F12:
fe = (37)(34)
100

=16* F8/18

Figure 7.16

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 Example 7.17 Conducting the Chi-Square Test

Cell F18:
(fo - fe)2/fe = 1.018
Cell 120:
2 = 6.49
=SUM(F18:H19)

Figure 7.17

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Example 7.17 (continued)
Conducting the Chi-Square Test (at  = 5%)
Critical Value Approach:
df = (r - 1)(c-1)
= (2 - 1)(3 - 1) = 2

Cell 122:
= CHISQ.INV.RT(, df)
= CHISQ.INV.RT(0.5, 2)
Critical value = 5.99
2 = 6.49  5.99
Reject H0.

Figure 7.17

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Example 7.17 (continued)
Conducting the Chi-Square Test (at  = 5%)

p-Value Approach:
Cell 123:
=CHISQ.TEST(fo, fe)
=CHISQ.TEST(F6:H7,
F12:H13)
p-value = 0.0389
Reject H0.

Figure 7.17

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Analytics in Practice:
Using Hypothesis Tests and Business Analytics in a
Help Desk Service Improvement Project
 Schlumberger International is an international
oilfield-services provider headquartered in
Houston, Texas.
 Their help desk moved from Ecuador to Houston
after two-sample hypothesis tests supported it.
 Use of various analytical techniques enabled their
help desk service to improve dramatically.

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 Alternative hypothesis
 Analysis of variance (ANOVA)
 Chi-square distribution
 Chi-square statistic
 Confidence coefficient
 Factor
 Hypothesis
 Level of significance
 Null hypothesis

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 One-sample hypothesis tests
 One-tailed test of hypothesis
 p-value (observed significance level)
 Power of the test
 Statistical inference
 Two-tailed tests of hypothesis
 Type I error
 Type II error

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 Recall that PLE produces lawnmowers and a medium
size diesel power lawn tractor.
 Look into differences in customer satisfaction by region
and type of satisfaction measure.
 Determine whether on-time deliveries, defectives, and
process costs have improved.
 Investigate employee retention as a function of gender,
college graduation, and home location.
 Write a formal report summarizing your results.

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