BUSINESS RESEARCH

METHODS
Prof.Radhika Kiran Kumar
Indira Institute of Business Management
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Inferential Statistics
 Populations and samples
» Taking a sample from a population

Sample data ‘represents’ the whole population

 Point estimation
Sample data is used to estimate parameters of a
population
Statistics are calculated using sample data.
Parameters are the characteristics of population data

sample mean Population mean

𝒙 estimates

Sample SD Population SD
s1 
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Hypothesis testing
 Hypothesis testing
» An objective method of making decisions
or inferences from sample data (evidence)

» Sample data used to choose between two

choices i.e. hypotheses or statements about
a population

» We typically do this by comparing what we

have observed to what we expected if one of
the statements (Null Hypothesis) was true
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Statistical Hypothesis
» If the hypothesis is stated in terms of population parameters (such as mean and
variance), the hypothesis is called statistical hypothesis.

» Data from a sample (which may be an experiment) are used to test the validity
of the hypothesis.

» A procedure that enables us to agree (or disagree) with the statistical hypothesis is called a
test of the hypothesis.

Example:
1. To determine whether the wages of men and women are equal.
2. A product in the market is of standard quality.
3. Whether a particular medicine is effective to cure a disease.
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The hypotheses
» The main purpose of statistical hypothesis testing is to choose between two competing
hypotheses.
Example :
One hypothesis might claim that wages of men and women are equal, while the
alternative might claim that men make more than women.

» Hypothesis testing start by making a set of two statements about the parameter(s) in
question.

» The hypothesis actually to be tested is usually given the symbol and is commonly
referred as the null hypothesis.

» The other hypothesis, which is assumed to be true when null hypothesis is false, is
referred as the alternate hypothesis and is often symbolized by
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Hypothesis Testing Procedures

The following five steps are followed when testing hypothesis
1. Specify and , the null and alternate hypothesis, and an acceptable
level of .

2. Determine an appropriate sample-based test statistics and the

rejection region for the specified .
3. Collect the sample data and calculate the test statistics.
4. Make a decision to either reject or fail to reject .
5. Interpret the result in common language suitable for practitioners.
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Errors in Hypothesis Testing
In hypothesis testing, there are two types of errors.

Type I error: A type I error occurs when we incorrectly reject (i.e., we reject the null
hypothesis, when is true).

Type II error: A type II error occurs when we incorrectly fail to reject (i.e., we
accept when it is not true).
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Probabilities of Making Errors

Type I error calculation

: denotes the probability of making a Type I error

Type II error calculation

: denotes the probability of making a Type II error

 Testing of Hypothesis 12

procedure…
» Hypothesis testing- consists of five steps.
» 1) State the hypotheses.- The hypotheses are stated in such a
way that they are mutually exclusive. That is, if one is true, the
other must be false.
» There are two types of statistical hypotheses.
» a) Null hypothesis.- Statement about the value of a population
parameter. The null hypothesis, denoted by H0.
» b) Alternative hypothesis- if the evidence proves null
hypothesis to be false. Then the alternative hypothesis is
accepted and null hypothesis is rejected. The alternative
hypothesis, denoted by H1 or Ha .
 Testing of Hypothesis 13

procedure…
» 2) Formulate an analysis plan to find the value of the test
statistic (mean score, proportion, t statistic, z-score, etc.) –

» The analysis plan describes how to use sample data to evaluate

the null hypothesis.

» a) When testing a hypothesis of a proportion , we use z-statistic

or z-test
 Testing of Hypothesis 14

procedure…
» b) When testing a hypothesis of a mean, we use the z-statistic or we
use the t-statistic according to the following conditions.
» i. If the population standard deviation, (σ) is known and either the
data is normally distributed or the sample size n > 30, we use the
normal distribution (z-statistic).
» ii. When the population standard deviation,(σ) is unknown and
either the data is normally distributed or the sample size is lesser
than 30 (n < 30), we use the t-distribution (t-statistic).
» iii. the level of significance is as follows: (a) the 0.10 level for
political polling, (b) the 0.05 level for consumer research projects,
and (c) the 0.01 level for quality assurance work
 Testing of Hypothesis 15

procedure…
» 3) Decision rule-statisticians describe decision rules in two ways - with reference to P-
value or with reference to a region of acceptance.
» a) P-value. The strength of evidence in support of a null hypothesis is measured by the
P-value. Suppose the test statistic is equal to S. The P-value is the probability of
observing a test statistic as extreme as S, assuming the null hypothesis is true. If the P-
value is less than the significance level, we reject the null hypothesis.
» b) Region of acceptance. The region of acceptance is a range of values. If the test
statistic falls within the region of acceptance, the null hypothesis is not rejected. The
region of acceptance is defined so that the chance of making a Type I error is equal to
the significance level. The set of values outside the region of acceptance is called the
region of rejection. If the test statistic falls within the region of rejection, the null
hypothesis is rejected. In such cases, we say that the hypothesis has been rejected at
the α level of significance.
» Some statistics tests use the P-value approach; others use the region of acceptance
approach.
 Testing of Hypothesis 16

procedure…
» One-Tailed and Two-Tailed
» a) one-tailed test- Tests-A test of a statistical hypothesis, where the region of rejection
is on only one side of the sampling distribution is called a one tailed test. For example,
suppose the null hypothesis states that the mean is less than or equal to 10. The
alternative hypothesis would be that the mean is greater than 10. The region of
rejection would consist of a range of numbers located on the right side of sampling
distribution; that is, a set of numbers greater than 10.

» b) two-tailed test- A test of a statistical hypothesis, where the region of rejection is on

both sides of the sampling distribution, is called a two tailed test. For example,
suppose the null hypothesis states that the mean is equal to 10. The alternative
hypothesis would be that the mean is less than 10 or greater than 10. The region of
rejection would consist of a range of numbers located on both sides of sampling
distribution; that is, the region of rejection would consist partly of numbers that were
less than 10 and partly of numbers that were greater than 10.
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One-Tailed Test
A one-tailed test would be used when we are to test, say,
whether the population mean is either lower or higher than the
hypothesis test value.

Symbolically,

Wherein there is one rejection region only on the left-tail (or

right-tail).
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Acceptance region
Acceptance region

.05 of area

.05 of area

Rejection region
Rejection region

¿ tailed test ¿ − tailed test

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Two-Tailed Test
For two-tailed hypothesis test, hypotheses take the form

In other words, to reject a null hypothesis, sample mean or

under a given .

Thus, in a two-tailed test, there are two rejection regions (also

known as critical region), one on each tail of the sampling
distribution curve.
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Acceptance region
Accept H0 ,if the sample
mean falls in this region

95 % of area

0.025 of area 0.025 of area

µH 0

Rejection region
Reject H0 ,if the sample mean falls
in either of these regions

Acceptance and rejection regions in case of a

two-tailed test with 5% significance level.
 Testing of Hypothesis 21

procedure…
» 4) Make Decision -The decision rules state the conditions under which the null
hypothesis will be accepted or rejected. The critical value for the teststatistic is
determined by the level of significance. The critical value is the value that divides the
non-reject region from the reject region. •
» Two types of errors can result from a hypothesis test.
» a) Type I error. A Type I error occurs when the researcher rejects a null hypothesis
when it is true. The probability of committing a Type I error is called the significance
level. This probability is also called alpha, and is often denoted by α.
» b) Type II error. A Type II error occurs when the researcher fails to reject a null
hypothesis that is false. The probability of committing a Type II error is called Beta,
and is often denoted by β. The probability of not committing a Type II error is called
the Power of the test.
 Testing of Hypothesis 22

procedure…
» 5) Interpret the decision-Compare the computed test statistic with
critical value.
» If the computed value is within the rejection region(s), we reject the
null hypothesis; otherwise, we do not reject the null hypothesis
 Case Study 1: Tea Sale 23

A tea stall vendor nearby Sanpada railway station has been having average
sales of 500 cups per day. Because of the development of a bus stand
nearby, it expects to increase its sales. During the first 12 days, after the
inauguration of the bus stand, the daily sales were as under:

550 570 490 615 505 580 570 460 600 580 530 526
On the basis of this sample information, can we conclude that the sales of
Tea have increased?
Consider 5% level of confidence.
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Hypothesis Testing : 5 Steps

The following five steps are followed when testing hypothesis
1. Specify and , the null and alternate hypothesis, and an acceptable level of .

2. Determine an appropriate sample-based test statistics and the rejection region

for the specified .
3. Collect the sample data and calculate the test statistics.
4. Make a decision to either reject or fail to reject .
5. Interpret the result in common language suitable for practitioner.
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Case Study 1: Step 1

Step 1: Specification of hypothesis and acceptable level of

Let us consider the hypotheses for the given problem as follows.

cups per day

The null hypothesis that sales average 500 cups per day and they
have not increased.

The alternative hypothesis is that the sales have increased.

Given the acceptance level of

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Case Study 1: Step 2

Step 2: Sample-based test statistics and the rejection region for specified

Given the sample as

550 570 490 615 505 580 570 460 600 580 530 526

Since the sample size is small and the population standard deviation is not known, we shall
use assuming normal population. The test statistics is

To find and , we make the following computations.

=
Case Study 1: Step 2
 Case Study 1: Step 2

Hence,

Note:
Statistical table for t-distributions gives a t-value given n, the degrees of freedom and ,
the level of significance and vice-versa.
 Case Study 1: Step 3

Step 3: Collect the sample data and calculate the test statistics

As is one-tailed, we shall determine the rejection region applying one-tailed in the right
tail because is more than type ) at level of significance.
Using table of for 11 degrees of freedom and with level of significance,
 Case Study 1: Step 3

Step 3: Collect the sample data and calculate the test statistics

As is one-tailed, we shall determine the rejection region applying one-tailed in the right
tail because is more than type ) at level of significance.
Using table of for 11 degrees of freedom and with level of significance,
 Case Study 1: Step 4

Step 4: Make a decision to either reject or fail to reject H0

The observed value of which is in the rejection region and thus is rejected at
level of significance.
 Case Study 1: Step 5

Step 5: Final comment and interpret the result

We can conclude that the sample data indicate that tea sales have
increased.
 Hypothesis Testing Strategies

⋄ The hypothesis testing determines the validity of an assumption (technically described as

null hypothesis), with a view to choose between two conflicting hypothesis about the value
of a population parameter.

⋄ There are two types of tests of hypotheses

 Non-parametric tests (also called distribution-free test of hypotheses)
 Parametric tests (also called standard test of hypotheses).
 Parametric Tests : Applications

⋄ Usually assume certain properties of the population from which we draw samples.
• Observation come from a normal population

• Sample size is small

• Population parameters like mean, variance, etc. are hold good.

• Requires measurement equivalent to interval scaled data.

 Parametric Tests

Important Parametric Tests

The widely used sampling distribution for parametric tests are

Note:
All these tests are based on the assumption of normality (i.e., the source of data is considered to be normally distributed).
 Parametric Tests : Z-test

: This is most frequently test in statistical analysis.

⋄ It is based on the normal probability distribution.
⋄ Used for judging the significance of several statistical measures particularly the mean.
⋄ It is used even when or is applicable with a condition that such a distribution tends to normal distribution
when n becomes large.

⋄ Typically it is used for comparing the mean of a sample to some hypothesized mean for the population in
case of large sample, or when population variance is known
 Parametric Tests : t-test

: It is based on the t-distribution.

⋄ It is considered an appropriate test for judging the significance of a sample mean or for judging the
significance of difference between the means of two samples in case of
⋄ small sample(s)
⋄ population variance is not known (in this case, we use the variance of the sample as an
estimate of the population variance)
Parametric Tests : -test
: It is based on F-distribution.
⋄ It is used to compare the variance of two independent samples.
⋄ This test is also used in the context of analysis of variance (ANOVA) for judging the
Pa ra metric Tests : -test

significance of more than two sample means.

⋄ Non-Parametric tests
 Does not under any assumption
 Assumes only nominal or ordinal data

Hypothesis Testing : Non-Parametric Test

Note: Non-parametric tests need entire population (or very large sample
size)
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THANKS!
Any questions?