Hypothesis Testing in Business Analytics – A Beginner’s Guide

Introduction 

Organizations must understand how their decisions can impact the business in this data-driven age. Hypothesis testing enables organizations to analyze and examine their decisions’ causes and effects before making important management decisions. Based on research by the Harvard Business School Online, prior to making any decision, organizations like to explore the advantages of hypothesis testing and the investigation of decisions in a proper “laboratory” setting. By performing such tests, organizations can be more confident with their decisions. Read on to learn all about hypothesis testing, one of the essential concepts in Business Analytics. 

What Is Hypothesis Testing? 

To learn about hypothesis testing, it is crucial that you first understand what the term hypothesis is.  

A hypothesis statement or hypothesis tries to explain why something happened or what may happen under specific conditions. A hypothesis can also help understand how various variables are connected to each other. These are generally compiled as if-then statements; for example, “If something specific were to happen, then a specific condition will come true and vice versa.” Thus, the hypothesis is an arithmetical method of testing a hypothesis or an assumption that has been stated in the hypothesis. 

Turning into a decision-maker who is driven by data can add several advantages to an organization, such as allowing one to recognize new opportunities to follow and reducing the number of threats. In analytics, a hypothesis is nothing but an assumption or a supposition made about a specific population parameter, such as any measurement or quantity about the population that is set and that can be used as a value to the distribution variable. General examples of parameters used in hypothesis testing are variance and mean. In simpler words, hypothesis testing in business analytics is a method that helps researchers, scientists, or anyone for that matter, test the legitimacy or the authenticity of their hypotheses or claims about real-life or real-world events. 

To understand the example of hypothesis testing in business analytics, consider a restaurant owner interested in learning how adding extra house sauce to their chicken burgers can impact customer satisfaction. Or, you could also consider a social media marketing organization. A hypothesis test can be set up to explain how an increase in labor impacts productivity. Thus, hypothesis testing aims to discover the connection between two or more than two variables in the experimental setting. 

How Does Hypothesis Testing Work? 

Generally, each research begins with a hypothesis; the investigator makes a certain claim and experiments to prove that the claim is false or true. For example, if you claim that students drinking milk before class accomplish tasks better than those who do not, then this is a kind of hypothesis that can be refuted or confirmed using an experiment. There are different kinds of hypotheses. They are: 

• Simple Hypothesis: Simple hypothesis, also known as a basic hypothesis, proposes that an independent variable is accountable for the corresponding dependent variable. In simpler words, the occurrence of independent variable results in the existence of the dependent variable. Generally, simple hypotheses are thought of as true and they create a causal relationship between the two variables. One example of a simple hypothesis is smoking cigarettes daily leads to cancer. 
• Complex Hypothesis: This type of hypothesis is also termed a modal. It holds for the relationship between two variables that are independent and result in a dependent variable. This means that the amalgamation of independent variables results in the dependent variables. An example of this kind of hypothesis can be “adults who don’t drink and smoke are less likely to have liver-related problems. 
• Null Hypothesis: A null hypothesis is created when a researcher thinks that there is no connection between the variables that are being observed. An example of this kind of hypothesis can be “A student’s performance is not impacted if they drink tea or coffee before classes. 
• Alternative Hypothesis: If a researcher wants to disapprove of a null hypothesis, then the researcher has to develop an opposite assumption—known as an alternative hypothesis. For example, beginning your day with tea instead of coffee can keep you more alert. 
• Logical Hypothesis: A proposed explanation supported by scant data is called a logical hypothesis. Generally, you wish to test your hypotheses or postulations by converting a logical hypothesis into an empirical hypothesis. For example, waking early helps one to have a productive day. 
• Empirical Hypothesis: This type of hypothesis is based on real evidence, evidence that is verifiable by observation as opposed to something that is correct in theory or by some kind of reckoning or logic. This kind of hypothesis depends on various variables that can result in specific outcomes. For example, individuals eating more fish can run faster than those eating meat.  
• Statistical Hypothesis: This kind of hypothesis is most common in systematic investigations that involve a huge target audience. For example, in Louisiana, 45% of students have middle-income parents. 

Four Steps of Hypothesis Testing 

There are four main steps in hypothesis testing in business analytics: 

Step 1: State the Null and Alternate Hypothesis 

After the initial research hypothesis, it is essential to restate it as a null (Ho) hypothesis and an alternate (Ha) hypothesis so that it can be tested mathematically. 

Step 2: Collate Data 

For a test to be valid, it is essential to do some sampling and collate data in a manner designed to test the hypothesis. If your data are not representative, then statistical inferences cannot be made about the population you are trying to analyze. 

Step 3: Perform a Statistical Test 

Various statistical tests are present, but all of them depend on the contrast of within-group variance (how to spread out the data in a group) against between-group variance (how dissimilar the groups are from one another). 

Step 4: Decide to Reject or Accept Your Null Hypothesis 

Based on the result of your statistical test, you need to decide whether you want to accept or reject your null hypothesis. 

Hypothesis Testing in Business  

When we talk about data-driven decision-making, a specific amount of risk can deceive a professional. This could result from flawed observations or thinking inaccurate or incomplete information, or unknown variables. The threat over here is that if key strategic decisions are made on incorrect insights, it can lead to catastrophic outcomes for an organization. The actual importance of hypothesis testing is that it enables professionals to analyze their assumptions and theories before putting them into action. This enables an organization to confirm the accuracy of its analysis before making key decisions. 

Key Considerations for Hypothesis Testing 

Let us look at the following key considerations of hypothesis testing: 

• Alternative Hypothesis and Null Hypothesis: If a researcher wants to disapprove of a null hypothesis, then the researcher has to develop an opposite assumption—known as an alternative hypothesis. A null hypothesis is created when a researcher thinks that there is no connection between the variables that are being observed. 
• Significance Level and P-Value: The statistical significance level is generally expressed as a p-value that lies between 0 and 1. The lesser the p-value, the more it suggests that you reject the null hypothesis. A p-value of less than 0.05 (generally ≤ 0.05) is significant statistically. 
• One-Sided vs. Two-Sided Testing: One-sided tests suggest the possibility of an effect in a single direction only. Two-sided tests test for the likelihood of the effect in two directions—negative and positive. One-sided tests comprise more statistical power to identify an effect in a single direction than a two-sided test with the same significance level and design.  

• Sampling: For hypothesis testing, you are required to collate a sample of data that has to be examined. In hypothesis testing, an analyst can test a statistical sample with the aim of providing proof of the credibility of the null hypothesis. Statistical analysts can test a hypothesis by examining and measuring a random sample of the population that is being examined. 

Real-World Example of Hypothesis Testing 

The following two examples give a glimpse of the various situations in which hypothesis testing is used in real-world scenarios. 

Example: BioSciences 

Hypothesis tests are frequently used in biological sciences. For example, consider that a biologist is sure that a certain kind of fertilizer will lead to better growth of plants which is at present 10 inches. To test this, the fertilizer is sprayed on the plants in the laboratory for a month. A hypothesis test is then done using the following: 

• H0: μ = 10 inches (the fertilizer has no effect on the plant growth) 
• HA: μ > 10 inches (the fertilizer leads to an increase in plant growth) 

Suppose the p-value is lesser than the significance level (e.g., α = .04). In that case, the null hypothesis can be rejected, and it can be concluded that the fertilizer results in increased plant growth. 

Example: Clinical Trials 

Consider an example where a doctor feels that a new medicine can decrease blood sugar in patients. To confirm this, he can measure the sugar of 20 diabetic patients prior to and after administering the new drug for a month. A hypothesis test is then done using the following: 

• H0: μafter = μbefore (the blood sugar is the same as before and after administering the new drug) 
• HA: μafter < μbefore (the blood sugar is less after the drug) 

If the p-value is less than the significance level (e.g., α = .04), then the null hypothesis can be rejected, and it can be proven that the new drug leads to reduced blood sugar. 

Conclusion 

Now you are aware of the need for hypotheses in Business Analytics. A hypothesis is not just an assumption— it has to be based on prior knowledge and theories. It also needs to be, which means that you can accept or reject it using scientific research methods (such as observations, experiments, and statistical data analysis). Most genuine Hypothesis testing programs teach you how to use hypothesis testing in real-world scenarios. If you are interested in getting a certificate degree in Integrated Program In Business Analytics, UNext Jigsaw is highly recommended.