What is Regression Analysis?

 Regression analysis is a statistical technique used to find the relations between two or more
variables.
 In regression analysis one or more variable/s is/are independent and its impact on the other
dependent variable is measured.
 Regression analysis is used to estimate the strength and the direction of the relationship
between two linearly related variables: X and Y. Where X is the “independent” variable and
Y is the “dependent” variable.

The two basic types of regression analysis are:

 Simple regression analysis:
o Used to estimate the relationship between a dependent variable and a single
independent variable; for example, the relationship between crop yields and rainfall.
 Multiple regression analysis:
o Used to estimate the relationship between a dependent variable and two or more
independent variables; for example, the relationship between the salaries of employees
and their experience and education. Multiple regression analysis introduces several
additional complexities but may produce more realistic results than simple regression
analysis.

Let’s understand it with a simple example.

Suppose you have a lemonade business. A simple linear regression could mean you finding a
relationship between the revenue and temperature, with revenue as the dependent variable. In case
of multiple variable regression, you can find the relationship between temperature, pricing and
number of workers to the revenue.

Thus, regression analysis can analyze the impact of varied factors on business sales and profits.

Caselette

Suppose you are a sales representative of a department store for 5 years and finally decided to skill
up to improve your career. You consider enrolling into a University but your friend Sam tells you,
“Don’t go to university, my uncle Jimmy has a PhD, and he’s unemployed!”. He added, “Rob
never went to school, and he’s rich!” His advice sounds quite wise indeed, but upon further
reflection, you realized that Jimmy is kleptomaniac and he’s essentially unemployable, and Rob is
rich because he won the lottery. But Sam has got you thinking, how do we know whether more
education will improve your career? More importantly, does education increases your wage?

With that in mind, you want to investigate the relationship between education and wage. So, you
conducted a survey of 20 individuals and ask each of them how much they earn and how many
years they spent in school. You have gathered the following information:
 Sample Years of Education Wage per hour
1. Sue 8 20
2. Peter 12 30
3. Liam 9 22
4. Noah 14 27
5. James 16 35
6. Emma 0 5
7. Isabella 8 18
8. Mia 10 22
9. Sophia 14 25
10. Amelia 18 40
11. Logan 16 38
12. Mark 8 22
13. Benjamin 0 5
14. Emily 5 10
15. Ella 12 28
16. Aria 15 30
17. Lucas 14 35
18. Chloe 18 38
19. Michael 11 30
20. Lily 10 25

Now, let us determine the general pattern of the data set that is to observe any relationship between
wage and education based on the points on the scatter graph.

A natural way of uncovering a possible pattern or relationship is by drawing the “line of best fit”
or the regression line. The line of best fit in the line that best represent the general pattern in the
sample. A regression line is simply the line of best fit for a given sample.
Recall from your high math that the equation of a line is Y = mx + b
where m = slope of a line (rise over run) , and
b = intercept of a line

In regression analysis, we represent the line as

B1 is the slope of the line. A 1 unit increase in X will lead to a B1 increase in Y

B0 is the value of Y when X is equal to zero.

Conclusion to the Casellete:

Since B1 >0, we can conclude that Wage and Education has a Positive Relationship. It means that
for every additional year of education, wages is expected to increase by $1.90 (B1) per hour. And
when education is equal to zero, wages is expected to be at $4.49 (B0) per hour.

Estimated Regression using the equation Y = 4.49 + 1.90 X

Site at least 2 examples

Residuals

This is the difference between the actual wage and the predicted wage. Residual exist because
there are factors that were not accounted for, these factors affect wages but are not included in the
model. In the context of wages and education, other factors that may influence a person’s wage
are experience, IQ, height, and etc.

Here some applications of regression analysis in business:

1. Predictive Analytics:
Predictive analytics i.e. forecasting future opportunities and risks is the most prominent application
of regression analysis in business. Demand analysis, for instance, predicts the number of items
which a consumer will probably purchase. However, demand is not the only dependent variable
when it comes to business. Regression analysis can go far beyond forecasting impact on direct
revenue. For example, we can forecast the number of shoppers who will pass in front of a particular
billboard and use that data to estimate the maximum to bid for an advertisement. Insurance
companies heavily rely on regression analysis to estimate the credit standing of policyholders and
a possible number of claims in a given time period.

2. Operation Efficiency:
Regression models can also be used to optimize business processes. A factory manager, for
example, can create a statistical model to understand the impact of oven temperature on the shelf
life of the cookies baked in those ovens. In a call center, we can analyze the relationship between
wait times of callers and number of complaints. Data-driven decision making eliminates
guesswork, hypothesis and corporate politics from decision making. This improves the business
performance by highlighting the areas that have the maximum impact on the operational efficiency
and revenues.
3. Supporting Decisions:
Businesses today are overloaded with data on finances, operations and customer purchases.
Increasingly, executives are now leaning on data analytics to make informed business decisions
thus eliminating the intuition and gut feel. Regression analysis can bring a scientific angle to the
management of any businesses. By reducing the tremendous amount of raw data into actionable
information, regression analysis leads the way to smarter and more accurate decisions. This does
not mean that regression analysis is an end to managers’ creative thinking. This technique acts as
a perfect tool to test a hypothesis before diving into execution.

4. Correcting Errors:
Regression is not only great for lending empirical support to management decisions but also for
identifying errors in judgment. For example, a retail store manager may believe that extending
shopping hours will greatly increase sales. Regression analysis, however, may indicate that the
increase in revenue might not be sufficient to support the rise in operating expenses due to longer
working hours (such as additional employee labor charges). Hence, regression analysis can provide
quantitative support for decisions and prevent mistakes due to manager's intuitions.

5. New Insights:
Over time businesses have gathered a large volume of unorganized data that has the potential to
yield valuable insights. However, this data is useless without proper analysis. Regression analysis
techniques can find a relationship between different variables by uncovering patterns that were
previously unnoticed. For example, analysis of data from point of sales systems and purchase
accounts may highlight market patterns like increase in demand on certain days of the week or at
certain times of the year. You can maintain optimal stock and personnel before a spike in demand
arises by acknowledging these insights.

In turn, the typical distance between the line and all the points (sometimes called the "standard
error") indicates whether the regression analysis has captured a relationship that is strong or weak.
The closer a line is to the data points, overall, the stronger the relationship.
Regression analysis, again, establishes a correlation between phenomena. But as the saying goes,
correlation is not causation. Even a line that fits the data points closely may not say something
definitive about causality. Perhaps some students do succeed in French class because they study
hard. Or perhaps those students benefit from better natural linguistic abilities, and they merely
enjoy studying more, but do not especially benefit from it. Perhaps there would be a stronger
correlation between test scores and the total time students had spent hearing French spoken before
they ever entered this particular class. The tale that emerges from good data may not be the whole
story.

So it still takes critical thinking and careful studies to locate meaningful cause-and-effect
relationships in the world. But at a minimum, regression analysis helps establish the existence of
connections that call for closer investigation.