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What does hypothesis testing mean?

What does hypothesis testing mean?

A theory about what will happen and why is a hypothesis, and to prove the hypothesis has some relevancy it will have to be compared to the probability of getting those results by pure chance.

A hypothesis is a testable prediction of results that should be observed due to the effects of an independent variable. Such predictions must be tested against the probability of the resulting observations happening due to complete chance instead of the influence of the independent variable.

The independent variable is the factor being controlled for in a measurable way so that observed results can be correlated to different degrees of exposure to the independent variable. The characteristics of the results being quantified are called the dependent variable because the results are supposed to depend on the independent variable (also called the “treatment”).

This is all language used in clinical studies in various fields, but it can be applied to studies in finance, where the influences of confounding variables, or factors which were not controlled for, are always looming.

The probabilities of the observed results happening by chance are called the null hypothesis, since it is basically the opposite of having a hypothesis, and the null hypothesis will stand unless refuted by the Alternative Hypothesis, which is the theory being tested. It is a logical test and a part of the scientific method for experimental design.

Keywords: correlation, clinical studies, scientific method, experimental design, null hypothesis, independent variable, treatment, confounding variables, market exposure,