hypothesis test

Statistical experiment

Type I error

Incorrect rejection of a true hypothesis

Type II error

Failure to reject a false hypothesis

Experiments involving measures of central tendency and measures of dispersion are often used to provide the information necessary for informed managerial decisions. A hypothesis test is a statistical experiment used to measure the reasonableness of a given theory or premise. In hypothesis testing, two different types of experimental error are encountered. Type I error is the incorrect rejection of a true hypothesis; Type II error is the failure to reject a false hypothesis. Because both can lead to bad managerial decisions, the probability of both types of error must be quantified and entered into the decision analysis. Although a wide variety of different hypothesis tests are often employed by managers, the basics of the technique can be illustrated using a simple means test example.

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