Contents

Introduction to the 2013 Edition ...................................................................................................... 1

You, Analytics, and Excel.............................................................................................................................................................2
Excel as a Platform .....................................................................................................................................................................4
What’s in This Book ....................................................................................................................................................................4
Introduction to this Edition .............................................................................................................. 7
Inside the Black Box ...................................................................................................................................................................8
Helping Out Your Colleagues ......................................................................................................................................................8
1 Building a Collector ....................................................................................................................11
Planning an Approach .............................................................................................................................................................12
A Meaningful Variable .......................................................................................................................................................12
Identifying Sales ................................................................................................................................................................13
Planning the Workbook Structure ............................................................................................................................................13
Query Sheets .....................................................................................................................................................................13
Summary Sheets ...............................................................................................................................................................18
Snapshot Formulas ............................................................................................................................................................20
Customizing Your Formulas................................................................................................................................................21
The VBA Code ...........................................................................................................................................................................23
The DoItAgain Subroutine ...........................................................................................................................................24
The DontRepeat Subroutine ........................................................................................................................................25
The PrepForAgain Subroutine ...................................................................................................................................25
The GetNewData Subroutine ........................................................................................................................................26
The GetRank Function....................................................................................................................................................30
The RefreshSheets Subroutine ...............................................................................................................................32
The Analysis Sheets..................................................................................................................................................................33
Defining a Dynamic Range Name ......................................................................................................................................34
Using the Dynamic Range Name .......................................................................................................................................36
2 Linear Regression ......................................................................................................................39
Correlation and Regression .....................................................................................................................................................39
Charting the Relationship .................................................................................................................................................40
Calculating Pearson’s Correlation Coefficient .....................................................................................................................43
Correlation Is Not Causation .....................................................................................................................................................45
Simple Regression ...................................................................................................................................................................46
Array-Entering Formulas ...................................................................................................................................................48
Array-Entering LINEST( ) ..................................................................................................................................................49
Multiple Regression ................................................................................................................................................................49
Creating the Composite Variable ......................................................................................................................................50
Entering LINEST( ) with Multiple Predictors ......................................................................................................................51
Merging the Predictors .....................................................................................................................................................51
Analyzing the Composite Variable ....................................................................................................................................53
 vi Predictive Analytics: Microsoft® Excel

Assumptions Made in Regression Analysis ..............................................................................................................................54

Variability .........................................................................................................................................................................55
Measures of Variability: Bartlett’s Test of Homogeneity of Variance ..................................................................................57
Means of Residuals Are Zero .............................................................................................................................................58
Normally Distributed Forecasts .........................................................................................................................................59
Using Excel’s Regression Tool ...................................................................................................................................................59
Accessing the Data Analysis Add-ln ..................................................................................................................................59
Accessing an Installed Add-ln ...........................................................................................................................................60
Running the Regression Tool .............................................................................................................................................61
Understanding the Regression Tool’s Dialog Box ...............................................................................................................62
Understanding the Regression Tool’s Output ....................................................................................................................64
3 Forecasting with Moving Averages .............................................................................................71
About Moving Averages ..........................................................................................................................................................71
Signal and Noise ...............................................................................................................................................................72
Smoothing Out the Noise .................................................................................................................................................73
Lost Periods ......................................................................................................................................................................74
Smoothing Versus Tracking ...............................................................................................................................................74
Weighted and Unweighted Moving Averages ...................................................................................................................76
Total of Weights ................................................................................................................................................................77
Relative Size of Weights ....................................................................................................................................................78
More Recent Weights Are Larger .......................................................................................................................................78
Criteria for Judging Moving Averages .....................................................................................................................................80
Mean Absolute Deviation ..................................................................................................................................................80
Least Squares ....................................................................................................................................................................80
Using Least Squares to Compare Moving Averages ............................................................................................................81
Getting Moving Averages Automatically .................................................................................................................................82
Using the Moving Average Tool .........................................................................................................................................83
Labels ...............................................................................................................................................................................85
Output Range ...................................................................................................................................................................85
Actuals and Forecasts ........................................................................................................................................................85
Interpreting the Standard Errors—Or Failing to Do So......................................................................................................87
4 Forecasting a Time Series: Smoothing .........................................................................................89
Exponential Smoothing: The Basic Idea....................................................................................................................................90
Why “Exponential” Smoothing? ...............................................................................................................................................92
Using Excel’s Exponential Smoothing Tool................................................................................................................................95
Understanding the Exponential Smoothing Dialog Box .....................................................................................................96
Choosing the Smoothing Constant ........................................................................................................................................102
Setting Up the Analysis ...................................................................................................................................................103
Using Solver to Find the Best Smoothing Constant ..........................................................................................................105
Understanding Solver’s Requirements .............................................................................................................................110
The Point .........................................................................................................................................................................113
Handling Linear Baselines with Trend ....................................................................................................................................114
Characteristics of Trend ....................................................................................................................................................114
First Differencing .............................................................................................................................................................117
 Contents vii

5 More Advanced Smoothing Models ...........................................................................................123

Holt’s Linear Exponential Smoothing .....................................................................................................................................123
About Terminology and Symbols in Handling Trended Series ..........................................................................................124
Using Holt’s Linear Smoothing.........................................................................................................................................124
Holt’s Method and First Differences .................................................................................................................................130
Seasonal Models ....................................................................................................................................................................133
Estimating Seasonal Indexes ...........................................................................................................................................134
Estimating the Series Level and First Forecast .................................................................................................................135
Extending the Forecasts to Future Periods .......................................................................................................................136
Finishing the One-Step-Ahead Forecasts .........................................................................................................................137
Extending the Forecast Horizon .......................................................................................................................................138
Using Additive Holt-Winters Models ......................................................................................................................................140
Level ................................................................................................................................................................................143
Trend ...............................................................................................................................................................................143
Season .............................................................................................................................................................................144
Formulas for the Holt-Winters Additive and Multiplicative Models........................................................................................145
Formulas for the Additive Model .....................................................................................................................................146
Formulas for the Multiplicative Model .............................................................................................................................148
The Models Compared ...........................................................................................................................................................149
Damped Trend Forecasts ........................................................................................................................................................151
6 Forecasting a Time Series: Regression .......................................................................................153
Forecasting with Regression ..................................................................................................................................................153
Linear Regression: An Example ........................................................................................................................................155
Using the LINEST( ) Function ...........................................................................................................................................158
Forecasting with Autoregression............................................................................................................................................164
Problems with Trends ......................................................................................................................................................164
Correlating at Increasing Lags..........................................................................................................................................165
A Review: Linear Regression and Autoregression.............................................................................................................168
Adjusting the Autocorrelation Formula............................................................................................................................169
Using ACFs .......................................................................................................................................................................171
Understanding PACFs.......................................................................................................................................................172
Using the ARIMA Workbook .............................................................................................................................................178
7 Logistic Regression: The Basics..................................................................................................181
Traditional Approaches to the Analysis ..................................................................................................................................181
Z-tests and the Central Limit Theorem.............................................................................................................................181
Sample Size and Observed Rate.......................................................................................................................................183
Binomial Distribution ......................................................................................................................................................183
Only One Comparison ......................................................................................................................................................184
Using Chi-Square .............................................................................................................................................................185
Preferring Chi-Square to a Z-test .....................................................................................................................................187
Regression Analysis on Dichotomies .....................................................................................................................................191
Homoscedasticity ............................................................................................................................................................191
Residuals Are Normally Distributed ................................................................................................................................194
Restriction of Predicted Range ........................................................................................................................................194
 viii Predictive Analytics: Microsoft® Excel

Ah, But You Can Get Odds Forever .........................................................................................................................................195

Probabilities and Odds .....................................................................................................................................................195
How the Probabilities Shift .............................................................................................................................................197
Moving On to the Log Odds ............................................................................................................................................200
8 Logistic Regression: Further Issues ............................................................................................203
An Example: Predicting Purchase Behavior ............................................................................................................................204
Using Logistic Regression ................................................................................................................................................205
Calculation of Logit or Log Odds ......................................................................................................................................213
Comparing Excel with R: A Demonstration .............................................................................................................................228
Getting R .........................................................................................................................................................................229
Running a Logistic Analysis in R ......................................................................................................................................229
Importing a csv File into R ...............................................................................................................................................230
Importing From an Open Workbook Into R ......................................................................................................................233
Understanding the Long Versus Wide Shape ...................................................................................................................234
Running Logistic Regression Using glm ...........................................................................................................................235
Statistical Tests in Logistic Regression ....................................................................................................................................240
Models Comparison in Multiple Regression .....................................................................................................................240
Calculating the Results of Different Models .....................................................................................................................241
Testing the Difference Between the Models ....................................................................................................................242
Models Comparison in Logistic Regression ......................................................................................................................243
9 Multinomial Logistic Regression ...............................................................................................253
The Multinomial Problem ......................................................................................................................................................253
Three Alternatives and Three Predictors .................................................................................................................................254
Three Intercepts and Three Sets of Coefficients ................................................................................................................256
Dummy Coding to Represent the Outcome Value ............................................................................................................256
Calculating the Logits ......................................................................................................................................................256
Converting the Logits to Probabilities ..............................................................................................................................257
Calculating the Log Likelihoods .......................................................................................................................................258
Understanding the Differences Between the Binomial and Multinomial Equations ........................................................258
Optimizing the Equations ................................................................................................................................................260
Benchmarking the Excel Results Against R ............................................................................................................................261
Converting the Raw Data Frame with mlogit.data..................................................................................................262
Calling the mlogit Function .........................................................................................................................................264
Completing the mlogit Arguments..............................................................................................................................266
Four Outcomes and One Predictor..........................................................................................................................................267
Multinomial Analysis with an Individual-Specific Predictor .............................................................................................269
Multinomial Analysis with an Alternative-Specific Predictor ...........................................................................................272
10 Principal Components Analysis .................................................................................................275
The Notion of a Principal Component ....................................................................................................................................275
Reducing Complexity .......................................................................................................................................................276
Understanding Relationships Among Measurable Variables ............................................................................................277
Maximizing Variance........................................................................................................................................................278
Components Are Mutually Orthogonal ............................................................................................................................280
 Contents ix

Using the Principal Components Add-In ................................................................................................................................281

The R Matrix ....................................................................................................................................................................284
The Inverse of the R Matrix ..............................................................................................................................................284
Matrices, Matrix Inverses, and Identity Matrices ..............................................................................................................287
Features of the Correlation Matrix’s Inverse .....................................................................................................................288
Matrix Inverses and Beta Coefficients ..............................................................................................................................290
Singular Matrices .............................................................................................................................................................293
Testing for Uncorrelated Variables ...................................................................................................................................293
Using Eigenvalues ............................................................................................................................................................295
Using Component Eigenvectors .......................................................................................................................................296
Factor Loadings ...............................................................................................................................................................299
Factor Score Coefficients ..................................................................................................................................................299
Principal Components Distinguished from Factor Analysis.....................................................................................................303
Distinguishing the Purposes ............................................................................................................................................303
Distinguishing Unique from Shared Variance...................................................................................................................303
Rotating Axes ..................................................................................................................................................................305
11 Box-Jenkins ARIMA Models .......................................................................................................307
The Rationale for ARIMA ........................................................................................................................................................307
Deciding to Use ARIMA ....................................................................................................................................................308
ARIMA Notation ...............................................................................................................................................................308
Stages in ARIMA Analysis.......................................................................................................................................................310
The Identification Stage .........................................................................................................................................................310
Identifying an AR Process ................................................................................................................................................310
Identifying an MA Process ...............................................................................................................................................313
Differencing in ARIMA Analysis........................................................................................................................................315
Using the ARIMA Workbook .............................................................................................................................................320
Standard Errors in Correlograms ......................................................................................................................................321
White Noise and Diagnostic Checking..............................................................................................................................322
Identifying Seasonal Models............................................................................................................................................323
The Estimation Stage .............................................................................................................................................................324
Estimating the Parameters for ARIMA(1,0,0) ...................................................................................................................324
Comparing Excel’s Results to R’s .......................................................................................................................................326
Exponential Smoothing and ARIMA(0,0,1) ......................................................................................................................329
Using ARIMA(0,1,1) in Place of ARIMA(0,0,1) ..................................................................................................................332
The Diagnostic and Forecasting Stages ..................................................................................................................................333
12 Varimax Factor Rotation in Excel ...............................................................................................335
Getting to a Simple Structure ...............................................................................................................................................335
Rotating Factors: The Rationale .......................................................................................................................................336
Extraction and Rotation: An Example ..............................................................................................................................339
Structure of Principal Components and Factors .....................................................................................................................344
Rotating Factors: The Results ..........................................................................................................................................345
Charting Records on Rotated Factors ..............................................................................................................................348
Using the Factor Workbook to Rotate Components .........................................................................................................350
Index ...........................................................................................................................................353