Null Hypothesis

A hypothesis that states that there is no relationship between two population parameters

What is the Null Hypothesis?

The null hypothesis states that there is no relationship between two population parameters, i.e., an independent variable and a dependent variable. If the hypothesis shows a relationship between the two parameters, the outcome could be due to an experimental or sampling error. However, if the null hypothesis returns false, it means that there is a relationship in the measured phenomenon.

 

Null Hypothesis

 

The null hypothesis is useful because it can be tested to conclude whether or not there is a relationship between two measured phenomena. It can inform the user whether the results obtained are due to chance or manipulating a phenomenon. Testing a hypothesis sets the stage for rejecting or accepting a hypothesis within a certain confidence level.

Two main approaches to statistical inference in a null hypothesis can be used– significance testing by Ronald Fisher and hypothesis testing by Jerzy Neyman and Egon Pearson. Fisher’s significance testing approach states that a null hypothesis is rejected if the measured data is significantly unlikely to have occurred (the null hypothesis is false). Therefore, the null hypothesis is rejected and replaced with an alternative hypothesis.

If the observed outcome is consistent with the position held by the null hypothesis, the hypothesis is accepted. On the other hand, the hypothesis testing by Neyman and Pearson is compared to an alternative hypothesis to make a conclusion about the observed data. The two hypotheses are differentiated based on observed data.

 

Summary

  • A null hypothesis refers a hypothesis that states that there is no relationship between two population parameters.
  • Researchers reject or disprove the null hypothesis to set the stage for further experimentation or research that explains the position of interest.
  • The inverse of a null hypothesis is an alternative hypothesis, which states that there is statistical significance between two variables.

 

How the Null Hypothesis Works

A null hypothesis is a theory based on insufficient evidence that requires further testing to prove whether the observed data is true or false. For example, a null hypothesis statement can be “the rate of plant growth is not affected by sunlight.” It can be tested by measuring the growth of plants in the presence of sunlight and comparing this with the growth of plants in the absence of sunlight.

Rejecting the null hypothesis sets the stage for further experimentation to see if there is a relationship between the two variables. Rejecting a null hypothesis does not necessarily mean that the experiment did not produce the required results, but it sets the stage for further experimentation.

To differentiate the null hypothesis from other forms of hypothesis, a null hypothesis is written as H0, while the alternate hypothesis is written as HA or H1. A significance test is used to establish confidence in a null hypothesis, and to determine the possibility that the observed data is not due to chance or manipulation of data.

Researchers test the hypothesis by examining a random sample of the plants being grown with or without sunlight. If the outcome demonstrates that there is a statistically significant change in the observed change, the null hypothesis is rejected.

 

Null Hypothesis Example

The annual return of ABC Limited bonds is assumed to be 7.5%. To test if the scenario is true or false, we take the null hypothesis to be “the mean annual return for ABC limited bond is not 7.5%.” To test the hypothesis, we first accept the null hypothesis.

Any information that is against the stated null hypothesis is taken to be the alternative hypothesis for the purpose of testing the hypotheses. In such a case, the alternative hypothesis is “the mean annual return of ABC Limited is 7.5%.”

We take samples of the annual returns of the bond for the last five years to calculate the sample mean for the previous five years. The result is then compared to the assumed annual return average of 7.5% to test the null hypothesis.

The average of the annual returns for the five years is 7.5%; the null hypothesis is rejected. Consequently, the alternative hypothesis is accepted.

 

What is an Alternative Hypothesis?

An alternative hypothesis is the inverse of a null hypothesis. An alternative hypothesis and a null hypothesis are mutually exclusive, which means that only one of the two hypotheses can be true.

A statistical significance exists between the two variables. If samples used to test the null hypothesis return false, it means that the alternate hypothesis is true, and there is statistical significance between the two variables.

 

Purpose of Hypothesis Testing

Hypothesis testing is a statistical process of testing an assumption regarding a phenomenon or population parameter. It is a critical part of the scientific method, which is a systematic approach to assessing theories through observations and determining the probability that a stated statement is true or false.

A good theory is one that can make accurate predictions. For an analyst who makes predictions, hypothesis testing is a rigorous way of backing up his prediction with statistical analysis. It also helps to determine if there is sufficient statistical evidence that favors a certain hypothesis about the population parameter.

 

Additional Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Coefficient of Determination
  • Independent Variable
  • Expected Value
  • Nonparametric Statistics

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!