Null Hypothesis
Categories: Financial Theory
When we're testing our hypothesis to determine if a claim that we have made (or that someone else has made) has some validity, we must have a statement that represents the status quo that we can use a standard against which we can line up our claim, and then determine which one has evidence supporting its validity.
It’s the null hypothesis’ job to be that measuring stick representing the status quo.
Let’s say common wisdom holds that 11% of the population is left-handed. Our experience with the thousands of employees we dine with in the Shmoop cafeteria is that this percentage is way too high. If we decided to test our claim that the percentage of lefties is less than 11%, we need a null hypothesis representing the status quo, i.e. the common knowledge about lefties. Our null hypothesis, denoted by H0, would be that the true percentage of lefties is 11%.