Introduction

Hypothesis testing is used in the Six Sigma Analyse Phase for screening potential causes. It is
a form of statistical inference that uses data from a sample to draw conclusions about a
population parameter or a population probability distribution.
Steps for hypothesis testing:
Step 1: Hypothesis Selection: The prediction based on wisdom is then considered as Null
Hypothesis (H0). Say H0 = x, H0<x, and H0> x. The alternate hypothesis (Ha) should be such
that it can be accepted or is unpredictable at the end of the test. For the above H0 given,
the respective alternate hypothesis would be: Hax, Ha x and Ha x.
Hypothesis should always be: Accepted or Failed to accept.
Step 2: Set the criteria for decision: To set the criteria for decision we state the level of
significance for a test.
Level of significance refers to the criterion of judgement upon which a decision is made
regarding the value stated in a null hypothesis. The criterion is based on the probability of
obtaining a statistic measured in a sample if the value stated in the null hypothesis were
true.
It is quite probable that there may be an incorrect decision on accepting hypothesis
(H0/Ha). Two types of error can occur which are:
a. H0 is true but Ha is accepted due to error in the data ( Error)- Type I error
b. Ha is true but H0 is accepted due to some error in the data ( Error)- Type II error
Various tests are available that can be used to check the significance of the data depending
on the hypothesis.
Both the cases would result in incorrect inference causing us to take wrong decision and
there by not achieving the desired results. To overcome that the test should be:
Fixed with an acceptable significance level (1- value). Say 95% or 99%. It means a
variation or error in the test results of around (): 5% or 1% is allowable. Higher the
significance level, more accurate is the test result.
Increase the sample size which will reduce the error.
Adequate care should be taken in defining the H0 and Ha. The error threshold should be
clearly defined and compared with appropriate probabilistic value which would determine
whether to accept H0 or not.
Step 3: Conduct the Test:
Select the appropriate test based on the information as given below:

Figure 1: Test selection for One X and One Y variable.

Figure 2: Test selection for more than 1X and one Y variable

Calculate the relevant test statistic based on the data type and distribution. The test statistic
is a mathematical formula to determine the likelihood of obtaining sample outcomes if the
null hypothesis were true.
With the test statistic calculated, arrive at the probability table value of the statistic or the
rejection region based on the given degrees of freedom and significance level.
For example, if the null hypothesis is defined by the parameter , then the statistics
computed on our data set would be the mean (x bar) and the standard deviation (s).
z= (mean 0) / (/n)
Step 4: Interpret the Results:
a. Compare the actual and expected values and choose whether the Alternate
Hypothesis can be accepted or not.
b. Now from the statistically computed information check if the p-value (Probability
value of error or variation) is less than the value.
p Value < value: Accept Alternate Hypothesis
p Value > value: Reject Alternate Hypothesis
Step 5: Conclusion
The conclusions consists of two statements-one describing the results of the null hypothesis
and the other describing the results of the alternative hypothesis. The first statement should
state as to whether we accepted or rejected the null hypothesis and for what value of alpha
or p-value for our test statistic. The second statement should answer the research question
proposed stating the sample statistic collected which estimated the parameter we
hypothesized.
Example:
An insurance company is reviewing its current policy rates. When originally setting the rates
they believed that the average claim amount was $1,800. They are concerned that the true
mean is actually higher than this, because they could potentially lose a lot of money. They
randomly select 40 claims, and calculate a sample mean of $1,950. Assuming that the
standard deviation of claims is $500, and set = .05, test to see if the insurance company
should be concerned.
Solution:
Step 1: Set the null and alternative hypotheses
H0: 1800
H1: > 1800
Step 2: Set the criteria for decision
The selection of significance level is typically = .05 or = .01 level. In this question, we
have selected = .05.
Step 3: Conduct the test
Calculate the test statistic
Z = (x bar 0)/ (/n) =1950 1800500/40= 1.897
Set Rejection Region
Looking at the picture below, we need to put all of in the right tail. Thus,
R: Z > 1.96

Step 4: Interpret the results:
We can see that 1.897 < 1.96, thus our test statistic is not in the rejection region. Therefore
we accept the null hypothesis.
Step 5: Conclusion
Accept the null hypothesis at = .05.
Based on the sample mean of $1,950 we cannot conclude anything statistically significant
from this test and cannot tell the insurance company whether or not they should be
concerned about their current policies.













References:
[1] Hypothesis Testing. [Online]. Available: http://www.whatissixsigma.net/hypothesis-
testing/
[2] Hypothesis Testing [Online] Available: http://www.six-sigma-material.com/Hypothesis-
Testing.html
[3] Some Hypothesis Testing Examples. [Online].
Available: http://www.unc.edu/~blopes/files/stat11spring03/Files/HypothesisTesting.pdf
[4] Five Steps of Hypothesis Testing. [Online]. Available:
http://www.unc.edu/~jamisonm/fivesteps.htm