CHAPTER 9

Pitfalls of Regression Analysis

Forming Incorrect Hypotheses

Chapter 3 demonstrated how one can regress one set of randomly generated numbers on another set of random numbers without any theory and obtain a coefficient and output and even analyze the results. In this section, another example of erroneous regression analysis is demonstrated to emphasize the importance of theory. Using regression analysis without a theory to guide, it is a waste of time. Let us start with a simple hypothetical example. Afterward, real data will be used to demonstrate the problem.

Assume we have collected the following data, without any theory whatsoever:

Y

X1

X2

11

5

12

13

12

10

l7

16

6

l9

19

4

21

39

1

Enter the data into Excel or Stata. ...

Get Regression for Economics, Second Edition now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.