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CORPORATE FINANCE FINANCIAL ANALYSIS

P-Value: What It Is, How

to Calculate It, and Why
It Matters
Learn why this is an important
statistics calculation
By BRIAN BEERS Updated February 19, 2023

Reviewed by SOMER ANDERSON

Fact checked by YARILET PEREZ

Jessica Olah / Investopedia

What Is P-Value?
In statistics, the p-value is the probability of
obtaining results at least as extreme as the
observed results of a statistical hypothesis test,
assuming that the null hypothesis is correct.
The p-value serves as an alternative to
rejection points to provide the smallest level of
significance at which the null hypothesis would
be rejected. A smaller p-value means that there
is stronger evidence in favor of the alternative
hypothesis.

P-value is often used to promote credibility for

studies or reports by government agencies. For
example, the U.S. Census Bureau stipulates
that any analysis with a p-value greater than
0.10 must be accompanied by a statement that
the difference is not statistically different from
zero. The Census Bureau also has standards in
place stipulating which p-values are acceptable
for various publications. [1]

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KEY TAKEAWAYS
A p-value is a statistical measurement
used to validate a hypothesis against
observed data.
A p-value measures the probability of
obtaining the observed results,
assuming that the null hypothesis is
true.
The lower the p-value, the greater the
statistical significance of the observed
difference.
A p-value of 0.05 or lower is generally
considered statistically significant. [1]
P-value can serve as an alternative to—
or in addition to—preselected
confidence levels for hypothesis
testing.

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How Is P-Value Calculated?

P-values are usually found using p-value tables
or spreadsheets/statistical software. These
calculations are based on the assumed or
known probability distribution of the specific
statistic tested. P-values are calculated from
the deviation between the observed value and
a chosen reference value, given the probability
distribution of the statistic, with a greater
difference between the two values
corresponding to a lower p-value.

Mathematically, the p-value is calculated using

integral calculus from the area under the
probability distribution curve for all values of
statistics that are at least as far from the
reference value as the observed value is,
relative to the total area under the probability
distribution curve.

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The calculation for a p-value varies based on

the type of test performed. The three test types
describe the location on the probability
distribution curve: lower-tailed test, upper-
tailed test, or two-tailed test.

In a nutshell, the greater the difference

between two observed values, the less likely it
is that the difference is due to simple random
chance, and this is reflected by a lower p-value.

The P-Value Approach to Hypothesis

Testing
The p-value approach to hypothesis testing
uses the calculated probability to determine
whether there is evidence to reject the null
hypothesis. The null hypothesis, also known as
the conjecture, is the initial claim about a
population (or data-generating process). The
alternative hypothesis states whether the
population parameter differs from the value of
the population parameter stated in the
conjecture.

In practice, the significance level is stated in

advance to determine how small the p-value
must be to reject the null hypothesis. Because
different researchers use different levels of
significance when examining a question, a
reader may sometimes have difficulty
comparing results from two different tests. P-
values provide a solution to this problem.

For example, suppose a study comparing

returns from two particular assets was
undertaken by different researchers who used
the same data but different significance levels.
The researchers might come to opposite
conclusions regarding whether the assets
differ.

If one researcher used a confidence level of

90% and the other required a confidence level
of 95% to reject the null hypothesis, and if the
p-value of the observed difference between the
two returns was 0.08 (corresponding to a
confidence level of 92%), then the first
researcher would find that the two assets have
a difference that is statistically significant,
while the second would find no statistically
significant difference between the returns.

To avoid this problem, the researchers could

report the p-value of the hypothesis test and
allow readers to interpret the statistical
significance themselves. This is called a p-value
approach to hypothesis testing. Independent
observers could note the p-value and decide
for themselves whether that represents a
statistically significant difference or not.

Warning: Even a low p-value is not

necessarily proof of statistical
significance, since there is still a
possibility that the observed data
are the result of chance. Only
repeated experiments or studies can
confirm if a relationship is
statistically significant.

Example of P-Value
An investor claims that their investment
portfolio’s performance is equivalent to that of
the Standard & Poor’s (S&P) 500 Index. To
determine this, the investor conducts a two-
tailed test.

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The null hypothesis states that the portfolio’s

returns are equivalent to the S&P 500’s returns
over a specified period, while the alternative
hypothesis states that the portfolio’s returns
and the S&P 500’s returns are not equivalent—if
the investor conducted a one-tailed test, the
alternative hypothesis would state that the
portfolio’s returns are either less than or
greater than the S&P 500’s returns.

The p-value hypothesis test does not

necessarily make use of a preselected
confidence level at which the investor should
reset the null hypothesis that the returns are
equivalent. Instead, it provides a measure of
how much evidence there is to reject the null
hypothesis. The smaller the p-value, the
greater the evidence against the null
hypothesis.

Thus, if the investor finds that the p-value is

0.001, there is strong evidence against the null
hypothesis, and the investor can confidently
conclude that the portfolio’s returns and the
S&P 500’s returns are not equivalent.

Although this does not provide an exact

threshold as to when the investor should
accept or reject the null hypothesis, it does
have another very practical advantage. P-value
hypothesis testing offers a direct way to
compare the relative confidence that the
investor can have when choosing among
multiple different types of investments or
portfolios relative to a benchmark such as the
S&P 500.

For example, for two portfolios, A and B, whose

performance differs from the S&P 500 with p-
values of 0.10 and 0.01, respectively, the
investor can be much more confident that
portfolio B, with a lower p-value, will actually
show consistently different results.

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Is a 0.05 P-value Significant?

A p-value less than 0.05 is typically considered
to be statistically significant, in which case the
null hypothesis should be rejected. A p-value
greater than 0.05 means that deviation from
the null hypothesis is not statistically
significant, and the null hypothesis is not
rejected. [1]

What Does a P-value of 0.001 Mean?

A p-value of 0.001 indicates that if the null
hypothesis tested were indeed true, then there
would be a one-in-1,000 chance of observing
results at least as extreme. This leads the
observer to reject the null hypothesis because
either a highly rare data result has been
observed or the null hypothesis is incorrect.

How Can You Use P-value to

Compare Two Different Results of a
Hypothesis Test?
If you have two different results, one with a p-
value of 0.04 and one with a p-value of 0.06, the
result with a p-value of 0.04 will be considered
more statistically significant than the p-value of
0.06. Beyond this simplified example, you could
compare a 0.04 p-value to a 0.001 p-value. Both
are statistically significant, but the 0.001
example provides an even stronger case
against the null hypothesis than the 0.04.

The Bottom Line

The p-value is used to measure the significance
of observational data. When researchers
identify an apparent relationship between two
variables, there is always a possibility that this
correlation might be a coincidence. A p-value
calculation helps determine if the observed
relationship could arise as a result of chance.

Correction—April 2, 2022: A previous version

incorrectly described the p-value as the
probability of results arising through random
chance.

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ARTICLE SOURCES

Related Terms
One-Tailed Test Explained:
Definition and Example
A one-tailed test is a statistical test in which the
critical area of a distribution is either greater or less
than a certain value, but not both. more

Goodness-of-Fit
A goodness-of-fit test helps you see if your sample
data is accurate or somehow skewed. Discover how
the popular chi-square goodness-of-fit test works.
more

Type II Error Explained, Plus

Example & vs. Type I Error
A type II error is a statistical term referring to the
failure to reject a false null hypothesis. more

Null Hypothesis: What Is It and How

Is It Used in Investing?
A null hypothesis is a type of statistical hypothesis
that proposes that no statistical significance exists in
a set of given observations. more

Z-Test Definition: Its Uses in

Statistics Simply Explained With
Example
A z-test is a statistical test used to determine whether
two population means are different when the
variances are known and the sample size is large.
more

What Is a Two-Tailed Test?

Definition and Example
A two-tailed test is the statistical testing of whether a
distribution is two-sided and if a sample is greater
than or less than a range of values. more

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