CHAPTER 3

Case Study 3—An Introduction to Regression Analysis and Its Application to the Measurement of Economic Damages

Not only are economic damages measured in terms of a stream of lost profits, but when a business is destroyed by the acts of the defendant the measure of damages becomes the value of the business immediately before the destructive act. Our purpose in this case study is twofold. First, we demonstrate how the value of a business's fixed and intangible assets can be estimated by applying regression analysis techniques to the direct market data method. Second, this case study serves as a primer on regression analysis as many of the statistical solutions to the measurement of damages for lost profits offered in the other case studies depend upon the use of this tool.

What Is Regression Analysis and Where Have I Seen It Before?

Technically speaking, curve fitting, or regression analysis, or simply regression is a generic term for all methods attempting to fit a model to observed data in order to quantify the relationship between two groups of variables. The fitted model may then be used either to describe the relationship between the two groups of variables, or to predict new values.

The two groups of variables involved in regression are usually denoted x and y, and the purpose of regression is to build a model where y = f(x). Such a model tries to explain the variations in the y-variable, or dependent variable, based on the variations in the x-variable, or independent ...

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