The relative efficiency of sequential tests

Abstract: While many statistical procedures rely on a fixed sample size, sequential methods allow a decision-maker to adapt the sample size to achieve a given precision. In this way, sequential tests reduce the average number of observations required to achieve a given power of the test -- but by how much? To address this question, we focus on the scenario of testing the unknown drift of a Brownian motion, comparing the Wald sequential probability ratio test with tests that use a pre-determined fixed sample size. We provide precise bounds on the average reduction in sample size needed to achieve a desired precision. Specifically, we demonstrate that for symmetric error bounds, the sequential test reduces the average sample size by at least 36\% and by at most 75\%. Moreover, the reduction in sample size increases monotonically with the power of the test, meaning that the relative advantage of using a sequential test over a fixed sample size test grows as higher power is required. We also study the relative efficiency in the case with asymmetric error bounds, and we provide a lower bound in terms of the symmetric case.