Testing the linear realationship in simple regression: 
Categorial variables: If a qualitative variable can have only one of two values, introduce an independent variable that is 0 for the one value and 1 for the other. for k categories we need k1 variables (base category is when all variables are 0) 

Check the pvalue for and compare to the desired 

reject if 
pvalue 

Non linear relationships: 
Trends –if the dependent variable increases or decreases in time, use a time counter or detrend the data first. Seasonal behavior – if there are seasonal patterns, use dummies or seasonally adjusted data. Time Lags – if a independent variable influences the dependent variable over a number of time periods, include past values in the model. Multicollinearity – a high correlation between two or more independent variables.Effects: 

1. 
Logarithmic transformation of the dependent variable: 

̂ Use when the y grows or depreciate at a certain rate in all ̂ 

2. 
Transformation of the independent variables 

Replace 
by 
, 
, 
or any other transforamtion 

that makes sense. Try when the relation is not linear and 1 does not make sense 

The standard errors of the 
s are inflated 

The magnitude (or even the signs) of the 
s may be different from 

what we expect 

Adding or removing variables produces large changes in the coefficient estimates or their signs 

The pvalue of the Ftest is small, but none of the tvalues is significant 

Decision Theory: 


How to build a decision tree: 

1. List all decisions and uncertainties 

2. Arrange them in a tree using decision and chance nodes Time 

3. Label the tree with probabilities (for chance nodes) and payoffs(at least at the end of each branch). 

4. Solve the tree/ fold back by taking the maximum of payoffs/ minimum of costs for decision nodes and the expected value for chance nodes toget the EMV (expected monetary value) Solve 
Regressions examples:
*Obtain 90% CI for expected change in TASTE if the concentration of LACTIC ACID increased by .01:
*What is the expected increase in peak load for 3 degree increase in high temp:
Prediction: Use output to estimate a 90% lower bound for predicted BAC of individual who had 4 beers 30 minutes ago: First calculate BAC hat. To obtain a lower bound on the blood alcohol level, we need to estimate S Forecast. See formula. S Forecast = 0.01844 So a lower bound =
Find 90% confidence interval for the expected weight of a car full of ore:
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