6.1 Hypothesis Tests & Types of Errors Flashcards
What are the steps in a hypothesis test?
State the hypothesis Select test statistic Specify significance level State the decision rule Compute sample statistic Make decision (reject or fail to reject)
What does the null hypothesis contain?
The null hypothesis is the one that the researcher wants to reject
It is the opposite to what the researcher expects
It always contains the = sign (including greater/less than or equal to)
What does the alternative hypothesis contain?
It is what is concluded if there is sufficient evidence to reject the null hypothesis
It will include the different to sign (two tailed), or less than, or greater than (for a one tailed test)
When do you reject the null hypothesis?
When the sample statistic is in the tail of the test (it exceeds the critical value)
What is the formula for the test statistic?
Sample value - hypothesised value / standard error of sample statistic
What is the formula for the standard error of the sample statistic?
If the variance is known… population standard deviation / square root of sample size
If variance is unknown… sample standard deviation / square root of sample size
What is a Type 1 error?
The probability of rejecting a null when it is actually true
It is the significance level
What is a type II error?
The probability of failing to reject the null when it is actually false
What is the power of the test?
The probability of correctly rejecting the null
It is 1 - the probability of making a type II error
How do you determine a confidence interval
Sample statistic +/- [critical value x standard error]
How do you construct a hypothesis test from a confidence interval?
Determine the critical value of the hypothesis test
Calculate the standard error of the sample mean & compare to critical value
Why may a statistically relevant result not be economically relevant?
Transactions costs
Taxes
Risk
