Bibliografia ‘Tomado “Practical Management Science”, Sth Edition de L1. Wayne L. Winston & S. Christian Albright, USA, 2015, Cengage. Cap. 14 Pégs, 785-845 icin de cealocinrostringia astantads ons Leplslocién sobre Devchos de Autor {ited 8 Rip de ota yx cults Beams os pie ‘Sree povaaery tale chit dv ct cnGil aaa ve REVENUE MANAGEMENT AT HARRAH’: CHEROKEE CASINO & HOTEL cal applications of forecasting are almost never done in isolation. They are Ro ly one part—a crucial part—of an overall quantitative solution to a business problem. This is certainly the case at Harrah's Cherokee Casino & Hotel in North Carolina, as explained in an article by Metters et al. (2008). This particular casino uses revenue management (RM) on a daily basis to increase its revenue from its gambling customers. As customers call to request reserva- ‘ons at the casino's hotel, the essential problem Is to decide which reserva- tions to accept and which to deny. The idea is that there is an opportunity cost from accepting early requests from lower-valued customers because higher- valued customers might request the same rooms later on. As the article explains, there are several unique features about casi- ‘nos, and this casino in particular, that make a quantitative approach to RM successful. First, the detailed behaviors of customers can be tracked, via electronic cards they use while placing bets in the electronic gambling ma- chines, so that the casino can create a large database of individual customers’ gambling patterns. This allows the casino to segment the customers into dif- ferent groups, based on how much they typically bet in a given night. For ex- ample, one segment might contain all customers who bet between $500 and ‘$600 per night. When a customer calls for 2 room reservation and provides his card number, the casino can immediately look up his information in the database and see which segment he is in. 785A second reason for the successful use of RM is that customers differ substantially in the price they are willing to pay for the same commodity, a stay at the casino’s hotel. Actu- ally, many don’t pay anything for the room or the food—these are frequently complimen- tary from the casino—but they pay by losing money at gambling. Some customers typically gamble thousands of dollars per night while others gamble much less, (This is quite different from the disparities in other hotels or in air travel, where a business traveler might pay twice as much as a vacationer, but not much more.) Becatise some customers are muich more valuable than others, there are real opportunity costs from treating all customers alike. A third reason for the success of RM at this casino is that the casino can afford to hold out for the best-paying customers until the last minute, The reason is that a signfi- cant percentage of the customers from all segments wait until the last minute to make their reservations. In fact, they often make them while driving, say, from Atlanta to the casino, Therefore, the casino can afford to deny requests for reservations to lower-valued ‘customers made a day or two in advance, knowing that last-minute reservations, very pos- sibly from higher-valued customers, will fill up the casino’s rooms. Indeed, the occupancy rate is virtually always 98% or above. The overall RM solution includes (1) data collection and customer segmenta- tion, as explained above, (2) forecasting demand for reservations from each customer segment, (3) a linear programming (LP) optimization model that is run frequently to decide which reservations to accept, and (4) a customer relationship management model to entice loyal customers to book rooms on nights with lower demand. The forecasting model is very similar to the Winters’ exponential smoothing model dis- cussed later in this chapter. Specifically, the model uses the large volume of historical data to forecast customer demand by each customer segment for any particular night in the future. These forecasts include information about time-related or seasonal pat- terns (weekends are busier, for example) and any special events that are scheduled. Also, the forecasts are updated daily as the night in question approaches. These fore- casts are then used in an LP optimization model to determine which requests to approve. For example, the LP model might indicate that, given the current status of bookings and three nights to go, requests for rooms on the specified night should be accepted only for the four most valuable customer segments. As the given night ap- proaches and the number of booked rooms changes, the LP model is rerun many times and provides staff with the necessary information for real-time decisions, (By the way, a customer who is refused a room at the casino is often given a free room at another nearby hotel. After all, this customer can still be valuable enough to offset the price of the room at the other hotel.) Ics difficult to measure the effect of this entire RM system because it has always been in place since the casino opened. But there is no doubt that it is effective. Despite the fact that it serves no alcohol and has only electronic games, not the traditional gaming tables, the casino has nearly full occupancy and returns a 60% profit margin on gross revenue—double the industry norm. m 14.1 INTRODUCTION Many decision-making applications depend on a forecast of some quantity. Here are several examples: When a service organization, such as a fast-food restaurant, plans its staffing over some time period, it must forecast the customer demand as a function of time. This might be done at a very detailed level, such as the demand in successive quatter- hour periods, or at a more aggregate level, such as the demand in successive weeks. 786 Chapter 14 Regression and Forecasting Models,1 When a company plans its ordering or production schedule for a product, it must forecast the customer demand for this product so that it ean stock appropriate quantities—neither too much nor too litle a When an organization plans to invest in stocks, bonds, or other financial instruments, it typically attempts to forecast movements in stock prices and interest rates, When government representatives plan policy, they attempt to forecast movements in macroeconomic variables such as inflation, interest rates, and unemployment. Many forecasting methods are available, and all practitioners have their favorites. To say the least, there is little agreement among practitioners or theoreticians as to the best forecasting method, The methods can generally be divided into three groups: (1) judg- mental methods; (2) regression methods; and (3) extrapolation methods. The first of these is basically nonquantitative and is not discussed here. Regression models, also called causal models, forecast a variable by estimating its relationship with other variables. For example, a company might use a regression model to estimate the relationship. between its sales and its advertising level, the population income level, the interest rate, and possibly others, The technique of regression is extremely popu- lar, due to its flexibility and power, Regression can estimate relationships between time se- ties variables or cross-sectional variables (those that are observed at a single point in time), and it can estimate linear or nonlinear relationships. Extrapolation methods, also called time series methods, use past data of a time series variable—and nothing else—to forecast future values of the variable. Many extrapolation methods are available, including the two we discuss here: moving averages and exponential smoothing. All extrapolation methods search for patterns in the historical series and then attempt to extrapolate these patterns into the future. Some try to track long-term upward or downward trends and then project these, Some try to track the seasonal pattems (sales up in November and December, down in other months, for example) and then project these. Much academic research has been devoted to forecasting methods in the past few decades, and with the advances in computing power, many of the methods described in the academic literature have been implemented in software packages. Interestingly, however, there is not complete agreement, even among academics, that we can obtain better fore- casts today than we could, say, in 1970. An article by Franses (2004) describes a survey of 76 members of the editorial boards of academic journals associated with forecasting. The survey asked several questions about the status of forecasting methods today versus a few decades ago. Most of the respondents believe that the advances in theory and software have resulted in better forecasts, but they are not unanimous in this opinion. They appear to recognize that quantitative forecasting methods can go only so far. Many of the respand- ents believe that the opinions of experts in the subject area should be used to complement the forecasts from software packages. In other words, they believe that human judgment should be included in the forecasting process. Regression analysis and time series analysis are both very broad topics, with many en- tire books and thousands of research articles devoted to them, We can only scratch the sur- face of these topics in a single chapter. However, alittle can go along way. By the time you have read this chapter, you will be able to apply some very powerful techniques. 14.2 OVERVIEW OF REGRESSION MODELS Regression analysis is the study of relationships between variables. It is one of the most useful tools for a business analyst because it applies to so many situations. Some potential uses of regression analysis in business address the following questions: 14.2 Overview Of Regression Models. 787Regression is capable of dealing with cross sectional data and time series data. Regression uses one or more explanatory variables to explain a single dependent variable. How do wages of employees depend on years of experience, years of education, and gender? ® How does the current price of a stock depend on its own past values, as well as the current and past values of a market index? © How docs a company’s current sales level depend on its current and past advertising levels, the advertising levels of its competitors, the company’s own past sales levels, and the general level of the market? © How does the unit cost of producing an item depend on the total quantity of items that have been produced? How does the selling price of a house depend on such factors as the square footage of the house, the number of bedrooms in the house, and perhaps others? Each of these questions asks how a single variable, such as selling price or employee ‘wages, depends on other relevant variables. If you can estimate this relationship, you can better understand how thi-world operates and also do a better job of predicting the variable in ques- tion. For example, you can understand how a company’s sales are affected by its advertising and also use the company’s records of current and past advertising levels to predict future sales, Regression analysis can be categorized in several ways. One categorization is based on the type of data being analyzed. There are two basic types: cross-sectional data and time series data, Cross-sectional data are usually data gathered from approximately the same period of time from a cross section of a population, The housing and wage examples mentioned previously are typical cross-sectional studies. The first concerns a sample of houses, presumably sold during a short period of time, such as houses sold in Bloomington, Indiana, daring the first quarter of 2015. The second concerns a sample of employees ob- served at a particular point in time, such as a sample of automobile workers observed at the beginning of 2014. In contrast, time series studies involve one or more variables that are observed at several, usually equally spaced, points in time. The stock price example men- tioned previously fits this description, The price of a particular stock and possibly the price of a market index are observed at the beginning of every week, say, and regression can then be used to explain the movement of the stock's price through time. ‘A second categorization of regression analysis involves the number of explanatory variables in the analysis, First, we must introduce some terms. Tn every regression study, the goal is to explain or predict a particular variable, This is called the dependent variable (or the response variable) and is often denoted genetically as Y. To help explain or pre- dict the dependent variable, one or more explanatory variables are used. These variables aro also called independent variables or predictor variables, and they are often denoted generically as X’s. If there is a single explanatory variable, the analysis is called simple regression. If there are several explanatory variables, itis called multiple regression. ‘There are important differences between simple and multiple regression. The primary difference, as the name implies, is that simple regression is simpler, The calculations are simpler, the interpretation of output is somewhat simpler, and fewer complications can occur. We will begin with a simple regression example to introduce the ideas of regression. ‘Then we will move on to the more general topic of multiple regression, of which simple regression is a special case. ‘You will learn how to estimate regression equations that describe relationships be- tween variables. You will also learn how to interpret these equations, explain aumerical measures that indicate the goodness-of-fit of the estimated equations, and describe how to use the regression equations for prediction.’ *yhe teams prediction and forecasting are practically synonymous, Some analysts reserve te term forecasting for future values of atime series vaciable and use the term prediction for any type of variable, time Series ar other- However, we do not make this distinction. BB. Chapter 14 Regression and Forecasting ModelsFigure 14.1 Scatterplot with Proposed Regression Line The Least-Squares Line ‘The basis for regression is a fairly simple idea. If you create a scatterplot of one vari- able ¥ versus another variable X, you obtain a swarm of points that indicates any possible relationship between these two variables. (The terms scatterplot, scatter chart, and XY chart are ail used to describe the same thing. We use scatterplot in this chapter.) To quan- tify this relationship, you try to find the best-fitting line (or curve) through the points in the ‘graph. But what does “best-fitting” really mean? ‘Consider the scatterplot in Figure 14.1. The line shown is one possible fit. It appears to be a reasonably good fit, but a numerical measure of goodness-of-fit is needed so that this fit can be compared with the fits of other possible lines. Scatterplot of ¥ vs X 140 tite Positive « 120 Negative od residual ; Height of line above Xo is predicted (ited) value for Xp 0 100 30 X> 40 30 oo 70 ‘The measure commonly used is the sum of squared residuals. Here, a residual is de- fined as the vertical distance from a point to the line, as illustrated for points A and B. If the point is above the line (point A), the residual is positive; if the point is below the line (point B), the residual is negative. The most commonly used measure of goodness-of-fit is the sum of squared residuals. Intuitively, a good fit should have & small sum of squared residuals. In fact, the goal in regression is to find the line with the minimum sum of squared residuals, where the minimum is over all possible lines. This is called the least-squares line and is the Jine found by regression, (Why are the residuals squared? One reason is to make them all positive, Another is to severely penalize large residuals. The most compelling reason, how- ever, is that this is the way it has been done by statisticians for many years.) A residual is a prediction error. It is the difference between an observed ¥ and the predicted Y from the regression line. ‘The least-squares regression line minimizes the sum of squared residuals. The details of the procedure used to find the Ieast-squares line are beyond the scope of this book. The procedure is basically a calculus problem. Fortunately, it is done automati- cally by regression software. You can rely on this software to find the least-squares line, and then you can interpret the results. Prediction and Fitted Values After you find the least-squares line, you can use it for prediction. Geometrically, this is easy. Given any value of X, you predict the corresponding value of Y to be the height of the 142 Overview of Regression Models 789The standard error of estimate is a measure of the magnitude of the prediction errors you are likely to make, bosed on the regres: sion equation line above this X. This is shown in Figure 14.1 for the value X,. The predicted ¥ value is called the fitted value. A fitted value is a predicted value of ¥ found by substituting given X values into the regression equation. In contrast, the height of any point is the actual value of ¥ for this point. This implies the following important relationship. It states that the residual for any point is the differ- ence between the observed value of ¥ and the predicted value of ¥. Relationship between residuals and fitted values Residual = Actual value — Fitted value In general, you estimate the least-squares line as 2 repres:ion equation relating ¥ to one ‘or more X's. For example, this equation might be ¥ = 5 + 3X. To predict ¥ for any given value of X, you substitute this value of X into the regression equation. The result is the fitted value of ¥. For example, with the proposed equation, if X = 2, the fitted (predicted) value of Vis 5 + 3(2) = 11. If you happen to know that the actual value of ¥ for this point is 13, then the residual is positive: 13 ~ 11 = 2. On the other hand, if the actual value is 8, the residual is negative: 8 — 11 = Measures of Goodness-of-Fit Besides the sum of squared residuals, other measures of goodness-of-fit typically are n regression analyses. We briefly describe these here and discuss them in more in subsequent sections Standard Error of Estimate The sum of squared residuals is measured in squared units of the ¥ variable. For exam- ple, if Yis sales in dollars, the sum of squared residuals is in squared dollars. It is more meaningful 1o obtain a related measure in dollars, ‘The resulting measure is called the standard error of estimate. The standard error of estimate is useful because it provides an estimate of the magnitude of the prediction errors you are likely to make. For ex- ample, if the standard error of estimate is $150, then as a ballpark estimate, you expect your predictions to be off by about $150. More precisely, the standard error of estimate behaves like a standard deviation, Therefore, from the well-known empirical rule of sta- tistics, you expect about 2/3 of your predictions to be no greater than $150 (one standard error) in magnitude, and you expect about 95% of your predictions to be no greater than $300 (two standard errors) in magnitude, Interpretation of standard error of estimate | ‘The standard error of estimate is a measure of the magnitude of the prediction errors when the regression equation is used for prediction. Multiple Rand R-Square Another goodness-of-fit measure is called the multiple R, defined as the correlation between the actual ¥ values and the fitted ¥ values. In general, a correlation is a number between ~1 790 Chapter 14 Regression and Forecasting ModelsThe Resquare value can never decrease as more explanatory vari- ables ore added to the regression equation, and +1 that measures the goodness-of-fit of the /inear relationship between two variables. A correlation close to ~1 or +1 indicates a tight linear fit, whereas a correlation close to 0 tends to indicate no Tinear fit~usually a shapeless swarm of points. In regression, you want the fited ¥ values to be close to the actual ¥ values, so you want a scatterplot of the actual values versus the fitted values to be close to a 45° line, with the multiple R close to +1. Interpretation of multiple R ‘The multiple R is the correlation between actual values of ¥ and the fitted values of Y. How large should multiple be to indicate a “good” fit? This is difficult to answer directly, other than to say “the larger, the better.” However, if you square the multiple R, you get a measure that has a more direct interpretation. This measure is known simply ‘as R-square. It represents the percentage of the variation of the ¥ values explained by the explanatory variables included in the regression equation. For example, if multiple R is 0.8, then R-square is 0.64, which means that 64% of the variation of Y has been explained by the regression. The idea is that the explanatory variables included in the regression are presumably related to ¥, so that they help explain why the Y values vary as they do. Naturally, you want the X variables to explain as much of this variation as possible, s0 you ‘want R-square values as close to 1 as possible. Interpretation of R-square Resquare, the square of multiple R, is the percentage of variation of Yexplained by the explanatory variables in the regression equation. Although R-square is probably the most frequently quoted measure in regression analyses, some caution is necessary. First, R-square values are often disappointingly low. Some variables in the business world (and other areas) are simply not easy to explain, particularly those in behavioral areas. Regressions in these areas sometimes have R-squares in the 10% to 20% range. This does not necessarily mean that these regressions are useless. After all, explaining 20% of the variation in some variable is better than not explaining anything at all. Second, R-squares can sometimes be inflated by adding Xs to the equation that do not really belong. This is due to the mathematical property that R-square can only increase, never decrease, when more explanatory variables are added to an equation. In general, you should avoid the temptation to build large equations with many explanatory variables just to pump up R-square. It is usually preferable to include only a few well-chosen explanatory variables and omit those that yield only marginal increases in R-square. Finding the right set of explanatory variables, however, is not easy. In fact, it is probably the biggest challenge an analyst faces and requires a good deal of experience. 14.3 SIMPLE REGRESSION MODELS Inthis section, we discuss how to estimate the regression equation fora dependent variable Ybasedonasingleexplanatory variebleX. (Thecommonterminology isthat“Yisregressed on X”) This is the equation of the least-squares line passing through the scatterplot of Y versus X. Because we are estimating a straight line, the regression equation is of the form Y = a + bX, where, as in basic algebra, a is called the intercept and b is called the slope. 143 Simple Regression Mode's. 794Equation for simple regression Y=at+bx Regression-Based Trend Models A special case of simple regression is when the only explanatory variable is time, usually labeled # (rather than X). In this case, the dependent variable Y is a time series variable, such as a company’s monthly sales, and the purpose of the regression is to see whether this dependent variable follows a trend through time. If there is a linear trend, the equation for Yhas the form Y= a+ bt, If b > O, then ¥ tends to increase by b units every time period, whereas if b < 0, then ¥ tends o decrease by b units every time period. Alternatively, if there is an exponential trend, the equation for ¥ has the form ¥ = ae”. In this case, the variable Y changes by a constant percentage each time period, and this percentage is approximately equal to the coefficient in the exponent, b. For example, if b = 0.025, then Y increases by about 2.5% per period, wheteas if b = —0.025, Y decreases by about 2.5% per period. | Interpretation of trend lines With a linear trend line, ¥ changes by a constant amount each period. ‘With an exponential trend line, ¥ changes by a constant percentage each period. The following example illustrates how easily trends can be estimated with Excel. bese thoy Vee Versa 9 Lay Jeis customary to T Best Chips Company produces and sells potato chips throughout the country, Its index time from | to sales have been growing steadily over the past 10 years, as shown in Figure 14.2 and the nant of time the file Exponential Growth.xlsx.? (Note that we have indexed the years so that year 1 Pe corresponds to 2004.) The company Wants to predict its sales for the next couple of years, assuming that the upward trend it has observed in the past 10 years will continue in the future. How should the company proceed’? Figure 14.2 Fi A B Historical Sales at 1 [Historical data | __ Best Chips iz Year Seles| 3 4 $4,345,000] a[ 2 $1,352,000] 5 3 |___ $1,463,000] 6 4 _ $1,511,000] 7 5 $1,610,000} 3 6 | ___ $1,649,000 9 7 $4,713,000} 10 8 $1,850,000] 1 9 $2,051,000] 12 10 $2,203,000} 2We omit the “Where Do the Numbers Come From?” sections in this chapter because the data sources should be obvious, 792 Chapter 14 Regression and Forecasting ModelsFigure 143 ‘Time Series Graph of Sales The coefficient of time in the linear trend line ‘equation represents the change in the vari- able per time period. Objective To fit linear and exponential trend lines to the company’s historical sales data and to use the better of these trend lines to predict future sales. Solu A good place to start any regression analysis in a time series context is with a time series graph. See Figure 14.3. Sales are clearly increasing over time, but it is not absolutely clear whether they are increasing at a constant rate, which would favor a linear trend line, or at an increasing rate, which would favor an exponential trend line. Therefore, you can try fitting both of these. n Sales $2,500,000 $2,000,000 ——. $1,500,000 $1,000,000 -o $500,000 —— Year Fitting a Linear Trend Line ‘To superimpose a linear trend line on a time series graph, right-click any point and select Add Trendline. This brings up the dialog box in Figure 14.4. You can select any of six types of trend lines. For now, select the default Linear option, and enter 2 in the Forward box to extend the forecast two periods into the future, Also, check the Display Equation on Chart option. (You can also elect to display the R-square value if you like.) The result appears in Figure 14.5, Excel Tip: Formatting the trendline equation To format the equation from the trendline, select any of its text, right-click, and select Format Trendline Label. This provides plenty of options. However, if you change the number formatting, say, to show 3 decimals, all of the numbers in the equation will show 3 decimals, This figure shows the best-fitting straight line to the points, and it indicates that the equation of this straight line is y = 92,091x + 1,168,200. Here, y corresponds to sales and x corresponds to year.* The most important part of this equation is the coefficient of x, 92,091. It implies that sales are increasing by $92,091 per year—f the linear trend line provides a good fit to the data Patthough we like to use the variable ro denote time, Fxcel ases the variable x in its trend-line equations. 143 Simple Regression Models 793igure 14.4 | DialogBoxfor | Adding a Trend Line The coefficient of time in the exponent of the exponential trend line equation represents the (approximate) percentoge chonge in the variable per time period. Format Trendline a TRENDLINE OPTIONS ¥ oOo? ll | | | | 4 TRENDLINE OPTIONS © Exponential @ Linear © Logarithmic © Polynomial Order © Power ¢ Moving eriot [2 Davee Petiod [2S Trendline Name @ Automatic Linear Gales) © Custom Fee eee Forecast Forward 2 period: Backward period: Display Equa O Display B-squared value on chart Fitting an Exponential Trend Line ‘To obtain an exponential trend line, you go through the same procedure except that you select the Exponential option in Figure 14.4. The resulting curve appears in Figure 14.6. The equation for the curve is y = 1,227,762¢°°™*, The most important part of this equation is the coefficient in the exponent, 0.054. It implies that sales are increasing by approximately 5.4% per year. In general, the coefficient in the exponent of an exponential trend line equation, when expressed as a percentage, indicates the approximate percentage by which the series changes cach period. Note that if this coefficient were negative, such as —0,0825, the series would be decreasing by approximately 3.25% each period (and the plot would be trending downward). 794 Chapter 14 Regression and Forecasting ModelsFigure 14.5 Graph with Linear ‘Trend Line Figure 14.6 Graph with Expo- nential Trend Line Sales $2,500,000 $2,000,000 $1,500,000 $1,000,000 }2,091x + 1,168,200 $500,000 — —- as 2 3 4 5 6 7 8 2 Year ‘Measuring the Goodness-of-Fit Which of these trend lines provides the better fi? You can proceed in two ways. First, you can eyeball it. Looking at the superimposed trend lines in Figures 14,5 and 14.6, it appears that the exponential fit might be slightly better. However, the typical way to measure fits to a trend line through time is to calculate the historical predictions from each curve and the corresponding absolute percentage errors. You can find the predictions by plugging the year indexes (1 to 10) into the trend-line equations. A measure of goodness-of-fit is then the average of the absolute percentage errors, denoted by MAPE (mean absolute percent- age error), This measure is quite intuitive. For example, if it is 2.1%, the predicted values for the historical period are off —too low or too high—by 2.1% on average. Sales $2,500,000 $2,000,000 $1,500,000 $000,000) $1,000,000 Vaan Ten iTie $500,000, Year ‘This is implemented in Figure 14,7. To create the predictions, absolute percentage errors, and MAPE values, proceed as follows: @ Predictions. Calculate the prediction formula 1168200+92091%A3 from the linear trend line by entering the in cell D3 and copying it down to cell D14. (Note that cells D13 and D14 then contain the predictions for two future years, There is no way to know how good these future predictions are until you observe their actual sales.) Similarly, calculate the predictions from the expo- nential trend line by entering the formula 143 Simple Regression Models 795Figure 14.7 Evaluating the Goodness-of-Fit of Each Trend Line Ax 3 c DT 7 | ¢ 1 [stort data_| | Frediions “Ronaute percentage evo Zp Year Linear! epeneniil| Linear! 3 et ‘$1,260,292 $1,296,013] 4 $1,362,382] $1,368.05) 5 ~[shaataral $1,444,120 aa $1,5365564| $1.528.388 7 Er sis26ss! —siy60o,.25 = 31720746, $1,698,561 e __|_$i8t2837)__ $1,793,005) 30 ~Siso4szal $1,992,678 i “[s1'397,010" $3,997,883 2 89,110) $2,108,956 | a ee t aa) eee | searazel — g2: HH is a 7 H 16) eer I 344x =1227762*EXP(0.0541*A3) in cell E3 and copying it down to cell 114, Note that you calculate to some power in Excel with Excel's EXP function, Excel Function: EXP ‘The formula =EXP(value) is equivalent to the special number ¢ raised to the power value. (Here, ¢ is approximately equal to 2.718.) For example, c** can be calculated in Excel with the formula =EXP(2.5), which evaluates to 12.1825, The EXP function is sometimes called the antilog function, @ Absotute percentage errors, Calculate all of the absolute percentage errors at once by entering the formula =ABS($B3-D3)/$B3 in cell F3 and copying it to the range F3:G12. This uses Excel’s ABS (absolute value) function, © MAPE values. Calculate the MAPE for each trend line by entering the formula =AVERAGE(3:F12) in cell F16 and copying it to cell G16. Discussion of the Results ‘The MAPE values indicate that the exponential trend line is slightly better than the linear trend line. The exponential trend fine is off, on average, by 2.39%, whereas the similar ‘igure for the Tinear trend line is 3.14%. The exponential trend line implies that sales are increasing by slightly more than 5% per year. The predictions in cells B15 and E16 pro- ject this 5% increase to the next two years, Again, however, you can’t tell how good these future predictions are until you observe actual sales in the next two years. Caution about Exponential Trend Exponential trend lines are often used in predicting sales and other economic quantities. However, we urge caution with such predictions. It is difficult for any company to sustain a given percentage increase year after year. For example, we used this same procedure es. 796 Chapter 14 Regression and Forecasting Modelsoon quarterly sales at the computer chip giant Intel, starting in 1986, Through 1996, Intel sales rose at a staggering rate of approximately 27% per year, and the corresponding exponential fit was quite good. However, more slowly, and in some quarters, they actually decreast ice that time, Intel’s sales have gone up much J. If we had used the exponential trend line through 1996 to forecast sales after 1996, we would have overpredicted by fhuge amounts. w Using an Explanatory Variable Other Than Time You are not restricted to using time as the explanatory variable in simple regression. Any variable X that is related to the dependent variable Y is a candidate, The following example y. It shows how you can still tke advantage of Excel's Add illustrates one such possibil Trendline option. oN ieee cere SSL meter ar oe Cote a company that produces a single product. For each of the past 16 months, the ‘company has kept track of the number of units produced as well as the total cost of production. These data appear in Figure 14.8 and in the file Cost Regression 1.xlsx. What does simple regression imply about the relationship between these two variables? How can it be used to predict future production costs for months 17 and 18, where only the planned values of Units Produced are known? Figure 14.8 Cost and Production Data for a Single Product A scatterplot of ‘Y ver- sus X is always a good place to stort in any regression analysis. ala 8 c B E E 6 | Month | Units Produced) Total cost ‘Month | Units Produced) Total Cosi zp 1 soo) $134,000 17 400) a] 2 600] $135,000) 8 800 at 3 ‘400| $104,000) 7 sf a | ‘300, $76,000) e] 5 00] $186,000] 76 00] $190,160) i a[ 7 | 600} $150,000 z 3] 8 400] $98,000] 7 | ec] 30] 9 300) $78,000) 2 ii] 10 200) $60,000) = | ua 400) $108,000] Bl 12 | 600] _ $152,000] z aa| 33 700| $158,000] se ceil as] 34 Soo] $134,380) 7 te} 15 | 300! $86,000 | 16 200] $60,000| Objective To use simple regression to estimate the relationship between Units Produced and Total Cost, and to use this relationship to predict future total costs. Solution ‘When you try to relate two variables with regression, it is always a good idea to create a scatterplot of the two variables first, just to see whether there is any relationship worth pur- suing, This can be done with Excel's chart tools in the usual way (sce the following tip). or it can be done easily with Palisade’s StatTools add-in. We will rely on StaTools for the rest of the statistical analysis in this chapter, so this is a good place to start. 142 Simple Regression Models 797Exeel Tip: Creating a Scatterplot with Excel To create a scattexplot in Excel, select the two series of data and then select a Seatter chart of some type from the Insert ribbon. By default, the range on the left wil be on the horizontal axis, | and the range on the right will be on the vertical axis, If this isn’t what you want, select the chart ‘and use the Select Data Source option on the Chart Tools Design ribbon to switeh the roles of the two series. This is the key step. You can experiment with other options, but they are mainly for formatting the chart, (If you want to use the StarTools add-in, which will be used in other ‘examples shortly, itis even easier to create one ot more scatterplots.) Excel Add-In: StatTools from Palisade ‘The StatTools add-in implements many statistical procedures, including regression analysis and forecasting. It is part of the Palisade DecisionTools Suite you probably already in- stalled for the use of @RISK and/or PrecisionTools in previous chapters. As with the other add-ins in the suite, you can load StatTools from the Windows Start button, selecting All Pregrams, and then StatTools from the Palisade DecisionTools group. If Excel is not already running, this will launch Excel. StatTools is very casy to usc. There is one basic thing you need to know: To get started ith any statistical analysis on any Excel data set, you must first use Data Set Manager from the Sta(Tools ribbon (see Figure 14.9) to designate a StatTools data set. The idea is that StatTools can analyze data only after it has been designated as a StatTools data set. You need to do this only once per data set, although a given Excel file can have multi- ple StarTools data sets. To do so for this example, select any cell in the data set, click the Data Set Manager button, click Yes (that you want a new StatTools data set), and fill out the resulting dialog box as in Figure 14.10. Usually, you can accept the clefaults in this dialog box and click directly on OK. However, you can change the name of the data set to something more meaningful than the default Data Set #1, and you can override the data set range. You can also check the Apply Cell Formatting box to apply a color and border to the data range, but we have not done so. Figure [4.9 StatTools Ribbon HOWE INSET _PAGELAYOUT FORMULAS ATA fav EW oevmorin [RatToos | sora setsis~ ly Narmaty Tests~ ARQualy Control | of Uses | ne | Summary Grepts~ [Ef Time Serius and Forecasting & Nonparametric Tests | @)Help~ DataSet Data | Manager Utilities» | Ay Statistical Inference |Z Regression and Classification Dts! Analyses (tet Once you have designated a StatTools data set, again the first step in any analysis, you can then create a scatterplot from the Summary Graphs dropdown list. This leads to the dialog box in Figure 14.11, where you can select the ¥ and X variables. (Actu- ally, you can select multiple ¥ and X variables. You will then get a scatterplot of each ¥-X pair.) You can also control where the results go (for the scatterplot procedure or any of the other StatTools procedures) by clicking the “double-check” button at the bottom, This leads to the dialog box in Figure 14.12, where you can select from the four Placement options shown. (We tend to favor either the Active Workbook option, which places the results on a new worksheet, or the Query for Starting Cell option, where you can designate where you want the results (o start. You can experi- ment with these options.) 798. Chapter 14 Regression and Forecasting Modelsigure 14.10 StatTools Data Set Manager Figure 14. StatTools Scatter- plot Dialog Box w in ato ‘pseatea esi pelieucture ul For Cerrredrd otal Cont ‘The resulting scatterplot for this example appears in Figure 14.13. This plot indicates a clear linear relationship, where Total Cost increases as Units Produced increases. Although this chart was created with StafTools, it (like other StatTools charts) is a regular Excel chart, so you can modify it just as you can modify any other Excel chart. In particular, you 143 Simple Regression Models 799Figure 14. Results Placement Options in StatTools isplay Comments Notes and Warnings Educational Comments updating Preference [Jota Sei beats Apply Cell Formatting Variable Layout: | finest Row l } i ~ Primary Range ‘rue ‘secondary Range Tue " flwarning Messages When Pee Iuperig Hssing Data |” tue “ignerine on tumerie Data Tae [Dialog Memory ‘Remember Last Used Values herent cakslations ‘ona (ase on rgut Oats) “OC eens 2s Figure 14.13 250000 Scatterplot of Total Cost versus Units Produced with Line 200000 y= 198.47x + 23643 Superimposed R2=0.9717 150000 100000 50000 Total Cost / Data for Regression 0 100 200 300 400 soo 600 700 Units Produced / Data for Regression Correlation 0.986 800 Chapter 14 Regression and Forecasting Models Scatterplot of Total Cost vs Units Produced of Data for Regressioncan superimpose a trend line along with the equation of the line and the R-square value, as shown in the figure. Discussion of the Results The equation of the straight line has slope 198.47 and intercept 23,643. For this exemple, both numbers have a natural interpretation, The slope corresponds to the unit variable cost of production. Each extra unit produced contributes an estimated $198.47 to total cost, ‘The intercept corresponds to the fixed cost of production, The estimate of the fixed cost is $23,643, regardless of the production level. As discussed previously, the R-squate value is the percentage of variation of Total Cost explained by Units Produced. In this case, Units Produced explains slightly more than 97% of the variation in Total Cost; only about 3% of this variation is left unexplained. Alterna- tively, multiple R, the square root of R-square, is the correlation between the actual Total Cost values and the fitted Total Cost values, as predicted by the regression equation. In this case, multiple R is \V0.9717 = 0.9858. Although the Add Trendline option leads to a quick regression equation, the Stat- ‘Tools regression procedure can be used to find the fitted values, the residuals, and the standard error of estimate. In addition, it can be used to find predictions and 95% pre- diction limits for the new data in months 17 and 18, where X but not Y is known.* There are two steps, where the first is required only if you want to make future predictions, 1, Designate the data for future months as a second StatTools data set with the Data Set Manager. We called it Data for Prediction, and it is the range E1:G3 (see Figure 14.8). 2, Select Regression from the StatTools Regression and Classification dropdown, list, and fill in the resulting dialog box as shown in Figure 14.14. There are several options in this dialog box. The options you will select most often are the following: Select Multiple as the Regression Type. There is no Simple option; you use Maltiple for one or more explanatory variables Make sure you select the appropriate data set from the Data Set dropdown list (in case you have defined multiple data sets). Select a single dependent variable in the D list and one or more explanatory (independent) variables in the list To see a chart of the residuals, along with a list of fitted values and residuals, select at least one of the optional graphs. We usually choose the third, Residuals vs Fitted Values, If you have a data set to be predicted, as in this example, check the bottom op- tion and select the appropriate data set to be predicted. The regression results appear in Figures 14.15 and 14.16, and the future predictions appear in Figure 14.17. There is a lot of information here, but the good news is that the regression output from StatTools includes the same items, mostly even in the same format, as the regression output from any other statistical package. The most important aspects of the output are the following: m= Theestimated regression line is specified by the values in the Coefficients column of Figure 14.15. In particular, the value in cell B19 implies that each additional unit produced adds about $198 to total cost In a previous edition, we used Excel's built-in Analysts Toolpak ad-in for much ofthe regression analysis and ‘moved to StatToots only when it was necessary later in the chapter. You can certainly continue to use the Analysis, Toolpak (which hasn’t been updated for close to two decades), but Stools is so much better that we are now using it roughout. 143 Simple Regression Models 80!ure 14.14 StatTools Regres- sion Dialog Box ra A 8 c . E F 6 8 liaultiate Rearesson for Toel Cost ul ‘ ‘Ajusted ‘SteiroF 3 [summary ® dean square Estimate 10 0986 ROY. AOE oy iz Degrees of sumof wean of nar ae TS [ANOVA Table Freedom Squares ps 14 [expired T 75381116403 25381116403 481.319 <0.0001 TS [Unenpisined 4 738253596.9 $2732399.78 16 17 ‘Standard fe aaa coaticlent ‘aa value p-value 19 [Constant ‘a716.872 5.042 (0,002 20 [Units Produced 9.046 21,939 <0,0001, 802 Chapter 14 Regression and Forecasting ModelsFigure 14.16 Fitted Values and Residuals 3A a 26 a cn 29] 3 a) 3 a] 7 a 3 a s 36 sr Ea 24 [oor rentcon fe sl las anno) 7ST ash saso0o zrzzeszz 772283220; ap. saio00 1030286811 S7O.aseRA8 aa 76000 a3183.0559-7183.008587 ails 1es000 1ezti6.os3 3582870722 30 s9p100oz762.6188— -azisz.61882 jure 14.17 Prediction of Future Values sp 10000 zmaasaa 7277307788 sal se00o seR025.6411 5029.25 sa Yeooo — SIa301559 “Sten. e587 Sif coco sises00s | “sa6aseOK8 seh toao00 sosmrscii2—_an70.see75 Sie 1s2000 | sazraaaao2 927710798 a 18000 exsenar? 5992776 a seas aze7eavey 115087634 sss coco enazonsss —amiessen whe congo ea2neasons _aascos Ml iE F H 1 1 Month | Units Produced | : fe 2 17 3 18 i @ The large R-square and multiple R values at the top of Figure 14.15 confirm exactly what the scatterplot indicates—that a very strong linear relationship exists between, Total Cost and Units Produced. @ The standard error of estimate at the top of Figure 14.15 indicates that the prediction errors based on this regression equation will be in the neighborhood of $7000—many prediction errors will be less than this value and a few will be more. This large an error might sound like a lot, but compared to the magnitudes of total costs, whieh are often well over $100,000, it is not all that large. The scatterplot of residuals versus fitted values in Figure 14.16 is a diagnostic tool used to see if there are peculiar points or patterns. The shapeless swarm seen here is aan indication that no regression assumptions are violated. This plot is based on the data below it, You can check that each fitted value can be found by plugging its X into the regression equation, and each residual is the difference between the actual Total Cost value and the predicted (fitted) value. The predictions in Figure 14.17 are also found by plugging the known Units Pro- cuced values into the regression equation, but no residuals are possible because the 143 Simple Regression Models 803actual Total Cost values are not yet known for these months. Instead, Stat Tools pro- vides the limits for a 95% prediction interval around each prediction. Essentially, if you make a lot of predictions based on a regression equation, about 95% of the actual Y values will be inside their respective 95% prediction intervals. = PROBL RY Solutions for problemas whose numbers appear within a colored box can be found in the Student Solutions Files Refer 1o this book's preface for purchase information. Level A L ‘The file P14_OL xlsx contains the monthly number of airline tickets sold by a travel agency. ‘a, Does a linear trend appear to fit these data well? 1 so, estimate and interpret the linear trend model for this time series. Also, interpret the R* and s, val b, Provide an indication of the typical forecast error generated by the estimated model in part a. . Is there evidence of some seasonal pattern in these sales data? If so, characterize the seasonal pattern. ‘The file P14_02,xlsx contains five years of monthly data on sales (number of units sold) for a particular company. The company suspects that except for rau dom noise, its sales are growing by a constant percent age each month and will continue to do so for at least the near future fa, Explain briefly whether the plot of the series visu- ally supports the company’s suspicion, b. By what percentage are sales increasing each month? . What is the MAPE for the forecast model in part b? In words, what does it measure? Considering its magnitude, does the model seem to be doing « ood job? d,_In words, how does the model make forecasts for future months? Specifically, given the forecast value for the Last month in the data set, what simple arithmetic could you use to obtain Forecasts for the next few months? The file P14_03.x1sx contains monthly data on prodac- tion levels and production costs during a four-year pe- riod for a company that produces a single product. Use simple regression on all of the data to see how Total Cost is related to Units Produced. Use the resulting equation to predict total cost in month 49, given thatthe proposed production level for that month is 450 units, Do you see anything wrong with the analysis? How should you modify your analysis if your main task is 10 find an equation useful for predicting future costs, and you know that the company installed new machinery B04 Chapter [4 Regression and Forecasting Models at the end of month 187 Write a concise memo to ‘management that describes your findings. ‘The file P14_O4.xIsx lists the monthly sales for a com pany (in millions of dollars) for a 10-year period. a. Fit an exponential trend line to these data. >, By what percentage do you estimate that the com- pany will grow each month? . Why can’t igh rate of exponential growth con- tinue for a long time? 4. Rather than an exponential curve, what type of curve might better represent the growth of a new technology? Management of a home appliance store wants to understand the growth pattern of the monthly sales of a new technology device over the past two years ‘The managers have recorded the relevant data in the file Pi4_05.xlsx, Have the sales of this device been growing linearly over the past 24 months? By examining the results of aHinear trend Tine, explain why or why not, Do the sales prices of houses in a given community vary systematically with their sizes (as measured in square feet)? Answer this question by estimating a simple regression equation where the sales price of the house is the dependent variable, and the size of the hhouse isthe explanatory variable. Use the sample data given in PL4_06.xlsx. Interpret your estimated equa. tion, the associated R-square value, and the associated standard error of estimate. ‘The file P14_07.xlsx contains monthly values of the U.S. national debt (in dollars) from 1995 to carly 2010. Fit an exponential growth curve to these data. Write a short report to summarize your findings. If the U.S. national debt continues to rise at the exponential rate you find, approximately what will its value be at the end of 2020? Level B ‘The management of a technology company is trying to dotermine the variable that best explains the variation of employee salaries using a sample of 52 full-time employees; see the file P14_08.xIsx. Estimate simple linear regression equations to identify which of the following has the strongest linear relationship withannual salary: the employee's gender, age, number power trend line for the data on demand and price of a of years of relevant work experience prior to employ. commodity listed in the file P14_09.xlsx, In particular, ment at the company, number of years of employment if price increases by 1%, what do you expect to hap- atthe company, or number of years of post secondary pen to demand? Calculate the MAPE for this power education. Provide support for your conclusion trend line. Would you say it indicates 2 good fit? EER We have discussed linear and exponential trend lines. 10. Sometimes curvature in a scatterplot can be fit Another popular choice is a power trond line, also adequately (especially to the naked eye) by several called a constant elasticity tend line, This trend line ‘rend lines. We discussed the exponential trend line, bas the form y = ax?, and it has the property that when ‘and the power trend line is discussed in the previous rinereases by 1%, y changes by a constant percent. problern. Still another fairly simple trend Tine is the age. In fact, this constant percentage is approximately parabola, a polynomial of order 2 (also called a equal to the exponent d (which could be positive or quadratic). Pr the demand-price data in the file negative), The power tread line is often cited in the P14_10.xtsx, fit all three of these types of trend lines economics literature, where, for example, x might be to the data, and calculate the MAPE for each. price and y might be demand, Fortunately, it can be ‘Which provides the best fit? (Hint: Note that a poly- found through Excel's Trendline tool; the power trend nomial of order 2 is stil another of Excel’s Trend line Jine is just another option, Bstimate and interpret a options. suze 14.4 MULTIPLE REGRESSION MODELS ‘When you try to explain a dependent variable ¥ with regression, there are often a multitude of explanatory variables to choose from. In this section, we explore multiple regression, where the regression equation for ¥ includes a number of explanatory variables. The gen- eral form of this equation is shown in the following box. Multiple regression equation Y= a+ bX, + bXy to + BX, In this equation, a is again the ¥-intercept, and 6, through b are the slopes. Collectively, a and the b’s are called the regression coefficients. Each slope coefficient is the expected change in Y when that particular X increases by one unit and the other X’s in the equation remain constant. For example, b; is the expected change in ¥ when X; increases by one unit and X, through X, remain constant. The intercept ais typically less important. Literally, itis the expected value of ¥ when all of the X’s equal 0. However, this makes sense only if itis cal for all of the X’s to equal 0, which is rarely the case. ‘We illustrate these ideas in the following extension of Example 14.2. Res MUS L a TALL ea ODT a Sues the company in Example 14.2 now produces three different products, A, B, and C, The company has kept track of the number of units produced of each product and the total production cost for the past 15 months. These data appear in Figure 14.18 and in the file Cost Regression 2.xIsx, What does multiple regression say about the rela- tionship between these variables? How can multiple regression be used to predict future production costs? Objective To use multiple regression to estimate the relationship between units pro- duced of three products and the total production cost, and to use this relationship to predict future total costs. 144 Mukiple Regression Models 805Figure 14.18 Cost and Production| Data for Multiple Products A useful frst step in multiple regression Is to create a scatterplot of Y versus each of the Xs When there are multi pile independent vario- bles, Excel's Trendline ‘option cannot be used 1 find the regression ‘equation. a Ts c ee [eee 1] Month | Unite) —Onfsea] Unis] Tote Col] pa | ee 55] $58,709] af 2 e27| 925] $50.27 ap 3 Fe) Bial $43,708 sf a 33 670] $50.57] sts 340) abe] $45,397] 76 463] 73] $46,731] sf 7 265) Tar| $4033 ce) #78] $42,368 io] 9 386) 52] 544617 ui] 10 |_| 467] $40,515 |g 7aa| $35,546 Bl | si 458] $36,856 | 13 57 360) $35,697 35/14 mi a7] $40,130 is] 5 wa 233] $59,523 Solution ‘The dependent variable Y is again Total Cost, but there are now three potential explanatory variables, Units A, Units B, and Units C. It is not necessary to use all three of these, but we do so here. In fact, it is again a good idea to begin with scatterplots of ¥ versus each X to sce which of them are indeed related to Y. You can do this in one step with StatTools, selecting Total Cost as the ¥ variable and Units A, B, and C as the X variables. A typical scatterplot appears in Figure 14.19. This scatterplot—and the ones for products A and C are similar—indicates a fairly strong linear relationship between Total Cost and Units B. ‘When there are multiple explanatory variables, you cannot estimate the multiple re- gression equation by using Excel’s Trendline option as you did with simple regression, However, you can still uso StatTools, exactly as in the previous example. As before, you Figure 14.19 Scatterplot of Total Cost versus Units B Total Cost /Data for Regression Scatterplot of Total Cost vs Units B of Data for Regression ‘70000 60000 0000 40000 30000 20000 110000 1 o 200 400 600 800 000 1200 Units B /Data for Regression Correlation 0.684 806 Chapter 14 Rogression and Forecasting Modelsmust first define StatTools data sets for the regression data (months 1 to 15) and for the prediction data set (months 16 and 17). Then you should fill in the StatTools Regression dialog box as shown in Figure 14.20, Figure 14.20 StatTools Dialog, Box for Multiple Regression ‘Vataiezens “pawlezcis ‘Datwib2016 @ bsepisuee : OC Uebike: pYalue tocntes é joo | pValue ta ceave cece | Satconntant te zero (Ori) “| Ftd Valine het vain TT Pte Wales ys vated ‘ech vetted Valine : Tela vexcioies | pAdvances opens ———— 17 indide dotted step rameter, indude redeson for Dats Set ee os Discussion of the Results ‘The resulting output appears in Figures 14.21 to 14.23. Again, we will not explain all of this output, but we will focus on the highlights. The most important part is the regression equation itself, which is implied by the values in the B19:B22 range: Predicted Total Cost = 20,261 + 12.802Units A + 17.691Units B + 15.230Units C The interpretation is much like that in simple regression, Bach coefficient of @ Units vari- able can be interpreted as a variable cost. For example, each extra unit of product B con- tributes about $17.69 to total cost. The constant term, 20,261, is again the estimated fixed cost of production. This cost is incurred regardless of the level of production. 14.4 Multiple Regression Models 807Figure 14.21 Multiple Regression Output Al A 8 € D F @ 8. [ata Regreston for Total cont. ‘aati ae Tasted 3 summary R ins Require 10 0973 03931 iL 12 Degres of sumot Meant TS [anova robe Freedom Squeres Squares binned iatese! 14 [boned 3 750480290.6 251493430,2 64.117 <0.0001 15 JUneepainet n 43146416.96 | 3922801.542 16 7 stoner contdonce intr 95% LE [erosion able eet for a aad tower Upper 19 {Const 1968138 10.295 = 0.000119929.442 _ 24593.103 20 Juris 2.083 6.187 < 0.0001 8.218 17.386 21 Junis 2137 8278 < 0.0001, 12.888 22.395 22 Juris 2.346 6.491. <.0.0001 10.065 20394 The interpretation of regression output for ‘multiple regression is similar to thot for simple regression, In particular, Resquare multiple R, the stand- ord error of estimate, the fitted values, and the residuals mean ‘exactly the same thing In both cases The other important outputs are R-square, multiple R, the standard error of estimate, the fitted values, and the residuals: 8 The R-squate value is the percentage of variation of Total Cost explained by the combination of all three explanatory variables. You can see that these three Units variables explain about 94,6% of the variation in Total Cost—a fairly high percentage. 5 The multiple R, the square root of R-square, is the correlation between the actual and fitted values of ¥, Because R-square is large, the multiple R is also large: 0.973, ‘This high value implies that the points in a scatterplot (not shown) of actual ¥ values versus fitted values are close to 2 45° line. The standard error of estimate has exactly the same interpretation as before. It is a balipark estimate of the magnitude of the prediction errors you are likely to make, based on the regression equation. Here, this value is about $1981—not too bad considering that the total costs vary around $50,000. = Asbefore, the fited values in Figure 14.22 are found by substituting each set of explanatory variable values into the regression equation, and the residuals are the differences between actual toval costs und fitted values. As indicated by the standard error of estimate, most of the residuals are no more than about $2000 in magnitude, and quite a few are considerably less than this. Also, the seatterplot of residuals ver- sus fitted values in Figure 14.22 is a shapeless swarm, a promising indication that no regression assumptions have been violated. = The predictions of future values in Figure 14.23 are found by plugging the known explanatory variable values into the regression equation. As before, StatTools pro- vides a 95% prediction interval for each of these predictions. 1 StatToois provides outputs with more decimal places than shown in the figures. We believe itis a good idea to round these. Don’t be fooled into thinking that regression can be accurate to 10 decimal places (or however many) just because the software shows this many decimal places. It is not that exact a science, especially not with data from the business world, ANote about Adjusted R-square You are probably wondering what the adjusted R-square value means in the multiple regression output. Although it has no simple interpretation like R-square (percentage of BOB Chapcer 14 Regression and Forecasting Models