Professional Documents
Culture Documents
Business Analytics
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Last lecture
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Business decision in action:
Identifying drivers of business outcomes
Starbucks currently owns 24,000 retail outlets in 72 countries.
When choosing a new location, Starbucks carefully examines the
profitability of each candidate location.
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Regression is useful in
explaining phenomena and forecasting
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Two types of data
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Hybrid auto sales
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Hybrid auto sales:
Gas price drives hybrid sales
50.0
Hybrid sales (K) 45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
2.00 2.50 3.00
Gas price ($ per gallon)
hybrid sales (K) = –13.8 + 15.2 gas price ($/gal)
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Hybrid auto sales:
Predict hybrid sales using gas price
50.0
Hybrid sales (K) 45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
2.00 2.50 3.00
Gas price ($ per gallon)
hybrid sales (K) = –13.8 + 15.2 gas price ($/gal)
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Hybrid auto sales:
Residuals
50.0
Hybrid sales (K) 45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
2.00 2.50 3.00
Gas price ($ per gallon)
Residual: differences between actual value & prediction
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What exactly did we do?
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What else can we do?
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Hypothesis test and CI for 𝜷𝟏
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Hypothesis test and CI for 𝜷𝟏
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Constructing prediction
interval for the dependent variable
𝑦ො ±T.INV.2T(𝛼, 𝑁 − 𝑘 − 1)*SE
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R Square and Standard Error
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“ANOVA” –
Analysis of Variance
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Regression equation in
standard format
Mark prediction Specify units
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Regression and correlation
2
• In simple linear regressions, R Square = 𝑟𝑥𝑦
• Correlation ≠ regression coefficient
– Correlation measures how much two values tend to
move together; bounded by [-1,1]
– Regression coefficient measures how much an
outcome changes with a unit change of a driver;
unbounded
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Correlation ≠ causation
40%
0
1.90 2.20 2.50 2.80 3.10
-7 20%
-14
gas price ($ per gallon)
0%
Skew: 1.2
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Linear regression is like
fitting a watermelon in a box…
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