Confidence intervals and hypothesis testing are closely related because both methods use the same underlying methodology. Additionally, there is a close connection between significance levels and confidence levels. Indeed, there is such a strong link between them that hypothesis tests and the corresponding confidence intervals always agree about statistical significance.
A confidence interval is calculated from a sample and provides a range of values that likely contains the unknown value of a population parameter. To learn more about confidence intervals in general, how to interpret them, and how to calculate them, read my post about Understanding Confidence Intervals.
In this post, I demonstrate how confidence intervals work using graphs and concepts instead of formulas. In the process, I compare and contrast significance and confidence levels. You’ll learn how confidence intervals are similar to significance levels in hypothesis testing. You can even use confidence intervals to determine statistical significance.
Read the companion post for this one: How Hypothesis Tests Work: Significance Levels (Alpha) and P-values. In that post, I use the same graphical approach to illustrate why we need hypothesis tests, how significance levels and P-values can determine whether a result is statistically significant, and what that actually means.
Significance Level vs. Confidence Level
Let’s delve into how confidence intervals incorporate the margin of error. Like the previous post, I’ll use the same type of sampling distribution that showed us how hypothesis tests work. This sampling distribution is based on the t-distribution, our sample size, and the variability in our sample. Download the CSV data file: FuelsCosts.
There are two critical differences between the sampling distribution graphs for significance levels and confidence intervals–the value that the distribution centers on and the portion we shade.
The significance level chart centers on the null value, and we shade the outside 5% of the distribution.
Conversely, the confidence interval graph centers on the sample mean, and we shade the center 95% of the distribution.
The shaded range of sample means [267 394] covers 95% of this sampling distribution. This range is the 95% confidence interval for our sample data. We can be 95% confident that the population mean for fuel costs fall between 267 and 394.
Confidence Intervals and the Inherent Uncertainty of Using Sample Data
The graph emphasizes the role of uncertainty around the point estimate. This graph centers on our sample mean. If the population mean equals our sample mean, random samples from this population (N=25) will fall within this range 95% of the time.
We don’t know whether our sample mean is near the population mean. However, we know that the sample mean is an unbiased estimate of the population mean. An unbiased estimate does not tend to be too high or too low. It’s correct on average. Confidence intervals are correct on average because they use sample estimates that are correct on average. Given what we know, the sample mean is the most likely value for the population mean.
Given the sampling distribution, it would not be unusual for other random samples drawn from the same population to have means that fall within the shaded area. In other words, given that we did, in fact, obtain the sample mean of 330.6, it would not be surprising to get other sample means within the shaded range.
If these other sample means would not be unusual, we must conclude that these other values are also plausible candidates for the population mean. There is inherent uncertainty when using sample data to make inferences about the entire population. Confidence intervals help gauge the degree of uncertainty, also known as the margin of error.
Related post: Sampling Distributions
Confidence Intervals and Statistical Significance
If you want to determine whether your hypothesis test results are statistically significant, you can use either P-values with significance levels or confidence intervals. These two approaches always agree.
The relationship between the confidence level and the significance level for a hypothesis test is as follows:
Confidence level = 1 – Significance level (alpha)
For example, if your significance level is 0.05, the equivalent confidence level is 95%.
Both of the following conditions represent statistically significant results:
- The P-value in a hypothesis test is smaller than the significance level.
- The confidence interval excludes the null hypothesis value.
Further, it is always true that when the P-value is less than your significance level, the interval excludes the value of the null hypothesis.
In the fuel cost example, our hypothesis test results are statistically significant because the P-value (0.03112) is less than the significance level (0.05). Likewise, the 95% confidence interval [267 394] excludes the null hypotheses value (260). Using either method, we draw the same conclusion.
Hypothesis Testing and Confidence Intervals Always Agree
The hypothesis testing and confidence interval results always agree. To understand the basis of this agreement, remember how confidence levels and significance levels function:
- A confidence level determines the distance between the sample mean and the confidence limits.
- A significance level determines the distance between the null hypothesis value and the critical regions.
Both of these concepts specify a distance from the mean to a limit. Surprise! These distances are precisely the same length.
A 1-sample t-test calculates this distance as follows:
The critical t-value * standard error of the mean
Interpreting these statistics goes beyond the scope of this article. But, using this equation, the distance for our fuel cost example is $63.57.
P-value and significance level approach: If the sample mean is more than $63.57 from the null hypothesis mean, the sample mean falls within the critical region, and the difference is statistically significant.
Confidence interval approach: If the null hypothesis mean is more than $63.57 from the sample mean, the interval does not contain this value, and the difference is statistically significant.
Of course, they always agree!
The two approaches always agree as long as the same hypothesis test generates the P-values and confidence intervals and uses equivalent confidence levels and significance levels.
I Really Like Confidence Intervals!
In statistics, analysts often emphasize using hypothesis tests to determine statistical significance. Unfortunately, a statistically significant effect might not always be practically meaningful. For example, a significant effect can be too small to be important in the real world. Confidence intervals help you navigate this issue!
Similarly, the margin of error in a survey tells you how near you can expect the survey results to be to the correct population value.
Learn more about this distinction in my post about Practical vs. Statistical Significance.
Finally, learn about bootstrapping in statistics to see an alternative to traditional confidence intervals that do not use probability distributions and test statistics. In that post, I create bootstrapped confidence intervals.
Neyman, J. (1937). Outline of a Theory of Statistical Estimation Based on the Classical Theory of Probability. Philosophical Transactions of the Royal Society A. 236 (767): 333–380.