Econometrics is the application of statistical methods to understand economic relations. Financial experts use this analytical tool to systematically find answers to questions posed to them in legal proceedings.
Regression analysis—one of the key techniques in econometrics—provides a statistical framework for understanding the relation between two or more variables. Financial experts often use regression analysis when they must reconstruct a world absent the alleged act, but hold all else constant. For instance, in an intellectual property dispute, the expert must estimate the patent owner's sales absent the infringer's products in the market, while holding constant the economy, the entrance of noninfringing substitutes into the market, and pricing. Similarly, in an employment discrimination case, the expert needs to understand how factors such as education, skill, and experience contribute to wage levels in an occupation or industry to assess what an employee would have earned in the same situation, absent the alleged discrimination.
Courts have recognized the usefulness of regression analysis in a wide range of applications. Other chapters in this book address many of these applications. This chapter examines some of the more subtle elements of regression analysis that frequently emerge in the litigation context, with particular focus on some of the common violations of assumptions ...