Chapter 13

1. Chapter 13 Inference About Comparing Two Populations

2. Comparing Two Populations Previously we looked at techniques to estimate and test parameters for one population: Population Mean µ Population Proportion p We will still consider these parameters when we are looking at two populations, however our interest will now be:  The difference between two means.  The ratio of two variances.  The difference between two proportions.

3. Population 1 Sample, size: n1 Statistics: Parameters: Difference between Two Means In order to test and estimate the difference between two population means, we draw random samples from each of two populations. Initially, we will consider independent samples, that is, samples that are completely unrelated to one another. (Likewise, we consider for Population 2)

4. Difference between Two Means Because we are comparing two population means, we use the statistic, which is an unbiased and consistent estimator of µ1- µ2.

5. Sampling Distribution of 1. is normally distributed if the original populations are normal –or– approximately normal if the populations are nonnormal and the sample sizes are large (n1, n2 > 30) 2. The expected value of is µ1- µ2 3. The variance of is and the standard error is:

6. Making Inferences About μ1-μ2 Since is normally distributed if the original populations are normal –or– approximately normal if the populations are nonnormal and the sample sizes are large, then: is a standard normal (or approximately normal) random variable. We could use this to build the test statistic and the confidence interval estimator for µ1 - µ2.

7. Making Inferences About μ1-μ2 …except that, in practice, the z statistic is rarely used since the population variances are unknown. Instead we use a t-statistic. We consider two cases for the unknown population variances: when we believe they are equal and conversely when they are not equal. More about this later… ??

8. Test Statistic for μ1-μ2 (equal variances) Calculate – the pooled variance estimator as… …and use it here: degrees of freedom

9. CI Estimator for μ1-μ2 (equal variances) The confidence interval estimator for μ1-μ2 when the population variances are equal is given by: pooled variance estimator degrees of freedom

10. Test Statistic for μ1-μ2 (unequal variances) 0 The test statistic for μ1-μ2 when the population variances are unequal is given by: Likewise, the confidence interval estimator is: degrees of freedom

11. ≥ Which test to use? 0 Which test statistic do we use? Equal variance or unequal variance? Whenever there is insufficient evidence that the variances are unequal, it is preferable to perform the equal variances t-test. This is so, because for any two given samples: The number of degrees of freedom for the equal variances case The number of degrees of freedom for the unequal variances case Larger numbers of degrees of freedom have the same effect as having larger sample sizes ≥

12. Testing the Population Variances Testing the Population Variances H0: σ12 / σ22 = 1 H1: σ12 / σ22 ≠ 1 Test statistic: s12 / s22, which is F-distributed with degrees of freedom ν1 = n1– 1 and ν2 = n2 −2. The required condition is the same as that for the t-test of µ1 - µ2, which is both populations are normally distributed.

13. Testing the Population Variances This is a two-tail test so that the rejection region is or

14. Example 13.1 Millions of investors buy mutual funds choosing from thousands of possibilities. Some funds can be purchased directly from banks or other financial institutions while others must be purchased through brokers, who charge a fee for this service. This raises the question, can investors do better by buying mutual funds directly than by purchasing mutual funds through brokers.

15. Example 13.1 To help answer this question a group of researchers randomly sampled the annual returns from mutual funds that can be acquired directly and mutual funds that are bought through brokers and recorded the net annual returns, which are the returns on investment after deducting all relevant fees. Xm13-01 Can we conclude at the 5% significance level that directly-purchased mutual funds outperform mutual funds bought through brokers?

16. Example 13.1 IDENTIFY To answer the question we need to compare the population of returns from direct and the returns from broker- bought mutual funds. The data are obviously interval (we've recorded real numbers). This problem objective - data type combination tells us that the parameter to be tested is the difference between two means µ1- µ2.

17. Example 13.1 IDENTIFY The hypothesis to be tested is that the mean net annual return from directly-purchased mutual funds (µ1) is larger than the mean of broker-purchased funds (µ2).Hence the alternative hypothesis is H1: µ1- µ2 > 0 and H0: µ1- µ2 = 0 To decide which of the t-tests of µ1 - µ2 to apply we conduct the F-test of σ12/ σ22 .

18. Example 13.1 IDENTIFY From the data we calculated the following statistics. s12 = 37.49 and s22 = 43.34 Test statistic: F = 37.49/43.34 = 0.86 Rejection region: or

19. Example 13.1 IDENTIFY Click Data, Data Analysis, and F-Test Two Sample for Variances

20. Example 13.1 IDENTIFY The value of the test statistic is F = .86. Excel outputs the one-tail p-value. Because we're conducting a two-tail test, we double that value. Thus, the p-value of the test we're conducting is 2 .3068 = .6136.

21. Example 13.1 IDENTIFY There is not enough evidence to infer that the population variances differ. It follows that we must apply the equal-variances t-test of µ1- µ2

22. Example 13.1 COMPUTE For manual calculations click Example 13.1 Manual Calculations For Excel skip to next slide.

23. Example 13.1 COMPUTE Click Data, Data Analysis, t-Test: Two-Sample Assuming Equal Variances

24. Example 13.1 COMPUTE

25. Example 13.1 INTERPRET The value of the test statistic is 2.29. The one-tail p-value is .0122. We observe that the p-value of the test is small (and the test statistic falls into the rejection region). As a result we conclude that there is sufficient evidence to infer that on average directly-purchased mutual funds outperform broker-purchased mutual funds

26. Confidence Interval Estimator Suppose we wanted to compute a 95% confidence interval estimate of the difference between mean caloric intake for consumers and non-consumers of high-fiber cereals. The unequal-variances estimator is We use the t-Estimate_2 Means (Eq-Var) worksheet in the Estimators workbook or manually (Click here).

27. Confidence Interval Estimator COMPUTE

28. Confidence Interval Estimator INTERPRET We estimate that the return on directly purchased mutual funds is on average between .39 and 5.43 percentage points larger than broker-purchased mutual funds.

29. Example 13.2 What happens to the family-run business when the boss’s son or daughter takes over? Does the business do better after the change if the new boss is the offspring of the owner or does the business do better when an outsider is made chief executive officer (CEO)? In pursuit of an answer researchers randomly selected 140 firms between 1994 and 2002, 30% of which passed ownership to an offspring and 70% appointed an outsider as CEO.

30. Example 13.2 For each company the researchers calculated the operating income as a proportion of assets in the year before and the year after the new CEO took over. The change (operating income after – operating income before) in this variable was recorded. Xm13-02 Do these data allow us to infer that the effect of making an offspring CEO is different from the effect of hiring an outsider as CEO?

31. Example 13.2 IDENTIFY The problem objective is to compare two populations. Population 1: Operating income of companies whose CEO is an offspring of the previous CEO Population 2: Operating income of companies whose CEO is an outsider The data type is interval (operating incomes). Thus, the parameter to be tested is µ1- µ2, where µ1 = mean operating income for population 1 and µ2 = mean operating income for population 2.

32. Example 13.2 IDENTIFY We want to determine whether there is enough statistical evidence to infer that µ1 is different from µ2. That is, that µ1- µ2 is not equal to 0. Thus, H1: µ1- µ2 ≠ 0 and H0: µ1- µ2 = 0 We need to determine whether to use the equal-variances or unequal-variances t –test of µ1- µ2.

33. Example 13.2 IDENTIFY Click Data, Data Analysis, and F-Test Two Sample for Variances

34. Example 13.2 IDENTIFY The value of the test statistic is F = .47. The p-value of the test we're conducting is 2 .0040 = .0080.

35. Example 13.2 IDENTIFY Thus, the correct technique is the unequal-variances t-test of µ1- µ2.

36. Example 13.2 COMPUTE For manual calculations click Example 13.2 manual calculations For Excel skip to next slide.

37. Example 13.2 COMPUTE Click Data, Data Analysis, t-Test: Two-Sample Assuming Unequal Variances

38. Example 13.2… COMPUTE

39. Example 13.2… INTERPRET The t-statistic is – 3.22 and its p-value is .0017. Accordingly, we conclude that there is sufficient evidence to infer that the mean times differ.

40. Confidence Interval Estimator We can also draw inferences about the difference between the two population means by calculating the confidence interval estimator. We use the unequal-variances confidence interval estimator of and a 95% confidence level. We use the t-Estimate_2 Means (Uneq-Var) worksheet in the Estimators workbook or manually (Click here).

41. Confidence Interval Estimator COMPUTE We activate the t-Estimate_2 Means (Uneq-Var) worksheet in the Estimators workbook and substitute the sample statistics and confidence level.

42. Confidence Interval Estimator INTERPRET We estimate that the mean change in operating incomes for outsiders exceeds the mean change in the operating income for offspring lies between .51 and 2.16 percentage points.

43. Checking the Required Condition Both the equal-variances and unequal-variances techniques require that the populations be normally distributed. As before, we can check to see whether the requirement is satisfied by drawing the histograms of the data.

44. Checking the Required Condition: Example 13.1 .

45. Checking the Required Condition: Example 13.2 .

46. Violation of the Required Condition When the normality requirement is unsatisfied, we can use a nonparametric technique-the Wilcoxon rank sum test for independent samples (Chapter 19)--to replace the equal-variances test of µ1-µ2 . We have no alternative to the unequal-variances test of µ1-µ2 when the populations are very nonnormal.

47. Terminology If all the observations in one sample appear in one column and all the observations of the second sample appear in another column, the data is unstacked. If all the data from both samples is in the same column, the data is said to be stacked.

48. Developing an Understanding of Statistical Concepts 1 The formulas in this section are relatively complicated. However, conceptually both test statistics are based on the techniques we introduced in Chapter 11 and repeated in Chapter 12. That is, the value of the test statistic is the difference between the statistic and the hypothesized value of the parameter measured in terms of the standard error.

49. Developing an Understanding of Statistical Concepts 2 As was the case with the interval estimator of p, the standard error must be estimated from the data for all inferential procedures introduced here. The method we use to compute the standard error of depends on whether the population variances are equal. When they are equal we calculate and use the pooled variance estimator sp2. We are applying an important principle here, and we will so again in Section 13.5 and in later chapters. Where possible, it is advantageous to pool sample data to estimate the standard error.

50. Developing an Understanding of Statistical Concepts 2 In the previous application, we are able to pool because we assume that the two samples were drawn from populations with a common variance. Combining both samples increases the accuracy of the estimate. Thus, sp2 is a better estimator of the common variance than either s12 or s22 separately. When the two population variances are unequal, we cannot pool the data and produce a common estimator. We must compute and use them to estimate σ12 and σ22, respectively.