Question

Often firms will make use of hypothesis testing to determine patterns in order to make informed business decisions. What are the advantages of hypothesis testing in the making of informed business decisions? Are there questions that cannot be answered through the use of hypothesis testing? Provide several real-world examples.

Answer 1

When running a business there are several areas that need decision making. These decisions are sometimes based on subjective grounds. However, in the most cases it is quantitative decision making that takes place which helps managers take up business decisions without introduction of any bias.

Hypothesis testing is one such tool that enables business owners to make statistically viable business decisions on a daily basis. With the help of hypothesis testing the data parameters are tested in order to make informed business decisions.

In the process samples are taken and their parameters are identified. Then they are tested for being true to the hypothetical value that the company assumes to be true for its product or service. This not only helps in understanding whether the sample taken was close to the standards of the company, but also helps the company get perspective about what the company is assuming that it is offering as opposed to the actual quality of its product r service.

Hypothesis testing helps objectify the subjective nature of the product or service that the business has to offer. In fact the process of rejecting the null hypothesis strongly as opposed to accepting it only gives that solid backing to the hypothesis testing problems.

The only problem with the hypothesis testing is that for a level of significance hypothesis test can strongly reject the null hypothesis. However, when the null hypothesis is true hypothesis testing does not provide sufficient evidence. So if one has to prove that there are exactly 100g of product in the pack, hypothesis testing will never give strong support to this null hypothesis.

But when one has to test the validity of a certain claim that 25% of the revenue is due to a give marketing strategy, hypothesis testing provides an important tool to test this claim and give it a statistical validity for the level of significance assumed.