STATISTICAL HYPOTHESES

Definition:
A statistical hypothesis is any proposition which can be tested with reference to a
random variable or population parameter.

Suppose there are two courses of action available: A1 and A2. Which one of the two
in a given situation would be a better course of action? The problem involves making
a decision . If we had full information available, making a decision would not be
problem. Normally, we do not have full information and our decision has to be made
based on incomplete information. This information is in the form of sample data.
This leads to some classical analysis of hypothesis testing.

The Unavoidability of Making Incorrect Decisions

The use of incomplete(sample) information implies that one is prone to make
mistakes of judgement. In the above example, either A1 or A2 is correct. Secondly,
either one can make a correct decision or not. The table below illustrates the
situation.

TRUE STATE OF AFFAIRS

DECISION A1 is Correct A2 is Correct
A1 is correct Correct Decision Wrong Decision
A2 is correct Wrong Decision Correct Decision

Null And Alternative Hypothesis

Null hypothesis: This is the formal statement or conjecture to be tested. It is usually
denoted by H0. The null hypothesis is often ,but not always the version of "Any
observed change or difference is due to chance", and the purpose of the hypothesis
test is usually to see whether a change had indeed occurred or a real difference exists.
That is why the hypothesis is called a null hypothesis, or a hypothesis of no change or
difference.

The Alternative Hypothesis

For each null hypothesis to be tested, there is an associated alternative hypothesis.
This is denoted by H1. The alternative hypothesis reflects the change or difference
anticipated by the individuals doing the hypothesis test. That is, if the null hypothesis
is not true, then what hypothesis is likely to be true? The answer to that question
provides the wording for the a specific alternative hypothesis.

ERRORS OF JUDGEMENT
Because of the mistakes one can make in judgement, there are errors associated with
these. These are called Type I and Type II errors.

Type I Error:

Rejection of the null hypothesis when it is true.

Type II Error:
Accepting the null hypothesis when it is false.

LEVEL OF SIGNIFICANCE

The two types of errors are quantified by associating probabilities with them. The
probability of making type I error is called the level of significance and is denoted by
the Greek letter  (alpha). In practice the individual doing the hypothesis testing
chooses an appropriate value of a. A common choice is a=0.05 which corresponds to
1 chance in 20 of making a type I error. If the Type I Error is very serious and would
be a costly mistake, then the level of significance would be set very low say a=0.01 or
smaller, thus ensuring a very low likelihood of making that type of error. This smaller
level of a decreases the probability of rejecting the null hypothesis and therefore
increases the probability of accepting a false null hypothesis- that is a Type II error.

SUMMARY OF THE DECISIONS AND THEIR PROBABILITIES

1st 2 nd
2

Definition:
Type I Error is the error made in
TRUE STATE OF AFFAIRS
DECISION A1 is Correct A2 is Correct
A1 is correct Correct Decision Wrong Decision
A2 is correct Wrong Decision Correct Decision