Business

Research Methods

William G. Zikmund

Chapter 23
Bivariate Analysis: Measures of
Associations
 Measures of Association
• A general term that refers to a number of
bivariate statistical techniques used to
measure the strength of a relationship
between two variables.
 Relationships Among Variables
• Correlation analysis
• Bivariate regression analysis
 Type of Measure of
Measurement Association

Interval and Correlation Coefficient

Ratio Scales Bivariate Regression
 Type of Measure of
Measurement Association

Ordinal Scales Chi-square

Rank Correlation
 Type of Measure of
Measurement Association

Chi-Square
Nominal Phi Coefficient
Contingency Coefficient
 Correlation Coefficient
• A statistical measure of the covariation or
association between two variables.
• Are dollar sales associated with advertising
dollar expenditures?
The Correlation coefficient for two

rxy
variables, X and Y is

.
 Correlation Coefficient
• r
• r ranges from +1 to -1
• r = +1 a perfect positive linear relationship
• r = -1 a perfect negative linear relationship
• r = 0 indicates no correlation
 Simple Correlation Coefficient

rxy  ryx 
  X  X Y  Y 
i i

  Xi  X   Yi  Y 
2 2
Simple Correlation Coefficient

 xy
rxy  ryx 
 2
x
2
y
Simple Correlation Coefficient
Alternative Method

 2
x= Variance of X
 = Variance of Y
2
y

 xy= Covariance of X and Y

Y
Correlation Patterns
NO CORRELATION

X
.
Y
Correlation Patterns
PERFECT NEGATIVE
CORRELATION -
r= -1.0

X
.
 Correlation Patterns
Y

A HIGH POSITIVE CORRELATION

r = +.98

X
.
 Calculation of r

 6.3389
r
17.837  5.589 
 6.3389
   .635
99.712
Pg 629
 Coefficient of Determination

Explained variance
r 
2

Total Variance
 Correlation Does Not Mean
Causation
• High correlation
• Rooster’s crow and the rising of the sun
– Rooster does not cause the sun to rise.
• Teachers’ salaries and the consumption of
liquor
– Covary because they are both influenced by a
third variable
 Correlation Matrix

• The standard form for reporting

correlational results.
 Correlation Matrix
Var1 Var2 Var3

Var1 1.0 0.45 0.31

Var2 0.45 1.0 0.10

Var3 0.31 0.10 1.0

 Walkup’s
First Laws of Statistics
• Law No. 1
– Everything correlates with everything, especially
when the same individual defines the variables to
be correlated.
• Law No. 2
– It won’t help very much to find a good correlation
between the variable you are interested in and
some other variable that you don’t understand any
better.
 Walkup’s
First Laws of Statistics
• Law No. 3
– Unless you can think of a logical reason why
two variables should be connected as cause and
effect, it doesn’t help much to find a correlation
between them. In Columbus, Ohio, the mean
monthly rainfall correlates very nicely with the
number of letters in the names of the months!
 Regression

DICTIONARY GOING OR
DEFINITION MOVING
BACKWARD

Going back to previous conditions

 Tall men’s sons
 Bivariate Regression
• A measure of linear association that
investigates a straight line relationship
• Useful in forecasting
 Bivariate Linear Regression

• A measure of linear association that

investigates a straight-line relationship
• Y = a + bX
• where
• Y is the dependent variable
• X is the independent variable
• a and b are two constants to be estimated
 Y intercept
• a
• An intercepted segment of a line
• The point at which a regression line
intercepts the Y-axis
 Slope
• b
• The inclination of a regression line as
compared to a base line
• Rise over run
• D - notation for “a change in”
160
Y Scatter Diagram
150
and Eyeball Forecast
140 My line
Your line
130

120

110

100

90

80

70 80 90 100 110 120 130 140 150 160 170 180 190
.
 Regression Line and Slope
Y

130

120

110

100
Yˆ  aˆ  ˆX
90 Yˆ
80
X

80 90 100 110 120 130 140 150 160 170 180 190
X
.
160
Y
Least-Squares
150 Regression Line
140
Actual Y for
Dealer 7
130

120

110 Y “hat” for Dealer 7

100 Y “hat” for

Dealer 3

90
Actual Y for
80
Dealer 3

70 80 90 100 110 120 130 140 150 160 170 180 190
X
 Scatter Diagram of Explained
Y
and Unexplained Variation
130
Deviation not explained

}
{}
120
Total deviation
110
Deviation explained by the regression
100
Y
90

80

80 90 100 110 120 130 140 150 160 170 180 190
X
.
 The Least-Square Method
• Uses the criterion of attempting to make the
least amount of total error in prediction of Y
from X. More technically, the procedure
used in the least-squares method generates a
straight line that minimizes the sum of
squared deviations of the actual values from
this predicted regression line.
 The Least-Square Method
• A relatively simple mathematical technique
that ensures that the straight line will most
closely represent the relationship between X
and Y.
Regression - Least-Square
Method

 e
i 1
is 2
minimum
i
ei = Yi - Ŷi (The “residual”)
Yi = actual value of the dependent variable
Ŷi = estimated value of the dependent variable (Y hat)
n = number of observations
i = number of the observation
 The Logic behind the Least-
Squares Technique
• No straight line can completely represent
every dot in the scatter diagram
• There will be a discrepancy between most of
the actual scores (each dot) and the predicted
score
• Uses the criterion of attempting to make the
least amount of total error in prediction of Y
from X
Bivariate Regression

ˆ
aˆ  Y  X
 Bivariate Regression

ˆ n   XY     X   Y 
 
n  X    X 
2 2
̂ = estimated slope of the line (the “regression coefficient”)
â = estimated intercept of the y axis
Y = dependent variable
Y = mean of the dependent variable
X = independent variable
X = mean of the independent variable
n = number of observations
ˆ 15193,345   2,806 ,875

15 245,759   3,515,625
2,900 ,175  2,806 ,875

3,686 ,385  3,515,625
93,300
  .54638
170,760
aˆ  99 .8  .54638 125 
 99 .8  68 .3
 31 .5
aˆ  99 .8  .54638 125 
 99 .8  68 .3
 31 .5
Yˆ  31 .5  .546  X 
 31 .5  .546  89 

 31 .5  48 .6
 80 .1
Yˆ  31 .5  .546  X 
 31 .5  .546  89 

 31 .5  48 .6
 80 .1
Dealer 7 (Actual Y value  129)
Yˆ7  31 .5  .546 165 
 121 .6
Dealer 3 (Actual Y value  80 )
Yˆ3  31 .5  .546  95 
 83 .4
 ˆ
ei  Y9  Y9
 97  96 .5
 0 .5
Dealer 7 (Actual Y value  129)
Yˆ7  31 .5  .546 165 
 121 .6
Dealer 3 (Actual Y value  80 )
Yˆ3  31 .5  .546  95 
 83 .4
 ˆ
ei  Y9  Y9
 97  96 .5
 0 .5
Y9  31 .5  .546 119 
ˆ
 F-Test (Regression)

• A procedure to determine whether there is

more variability explained by the regression
or unexplained by the regression.
• Analysis of variance summary table
 Total Deviation can be
Partitioned into Two Parts
• Total deviation equals
• Deviation explained by the regression plus
• Deviation unexplained by the regression
 “We are always acting on what has just
finished happening. It happened at least
1/30th of a second ago.We think we’re in
the present, but we aren’t. The present we
. know is only a movie of the past.”
Tom Wolfe in
The Electric Kool-Aid Acid Test
 Partitioning the Variance


Yi  Y   Yi  Y
ˆ   ˆ
 Yi  Yi 
Deviation
Deviation unexplained by
Total
= explained by the + the regression
deviation regression
(Residual
error)
Y = Mean of the total group
Ŷ = Value predicted with regression equation
Yi = Actual value
 Y  Y   Y 
 
  Yi  Yˆi 
2 2
2
 Yˆ
i i

Total Unexplained
Explained
variation = + variation
variation
explained (residual)
 Sum of Squares

SSt  SSr  SSe

 Coefficient of Determination
r2
• The proportion of variance in Y that is
explained by X (or vice versa)
• A measure obtained by squaring the
correlation coefficient; that proportion of
the total variance of a variable that is
accounted for by knowing the value of
another variable
Coefficient of Determination
r 2

SSr SSe
r 
2
1
SSt SSt
 Source of Variation
• Explained by Regression
• Degrees of Freedom
– k-1 where k= number of estimated constants
(variables)
• Sum of Squares
– SSr
• Mean Squared
– SSr/k-1
 Source of Variation
• Unexplained by Regression
• Degrees of Freedom
– n-k where n=number of observations
• Sum of Squares
– SSe
• Mean Squared
– SSe/n-k
 r2 in the Example

3,398 .49
r 
2
 .875
3,882 .4
 Multiple Regression
• Extension of Bivariate Regression
• Multidimensional when three or more
variables are involved
• Simultaneously investigates the effect of
two or more variables on a single dependent
variable
• Discussed in Chapter 24
 Correlation Coefficient, r = .75
Correlation: Player Salary and Ticket
Price

30
20 Change in Ticket
10 Price
0 Change in
-10 Player Salary
-20
1995 1996 1997 1998 1999 2000 2001