Regression analysis is a widely used statistical technique; it helps investigate and model relationships between variables. It also uses a derived model to predict a variable of interest. The potential applications of regression analysis are numerous and can be found in almost every field, including economics, biology, management, chemical science and social science. Applying regression does require special attention from the analyst. Each process step – from model specification and data collection, to model building and model validation, to interpreting the developed model – needs to be carefully examined and executed. A small mistake in any of these steps may lead to an erroneous model. This article describes some common mistakes made in regression and their corresponding remedies.
The main intent of performing a regression analysis is to approximate a functional relationship between two or more variables by a mathematical model and to then use that derived mathematical model to predict the variable of interest. The first step in regression modeling is to specify the model – that is, define the response and predictor variables. Unfortunately, this is the step where it is easy to commit the gravest mistake – misspecification of the model.
Model misspecification means that not all of the relevant predictors are considered and that the model is fitted without one or more significant predictors. Just because a regression analysis indicates a strong relationship between two variables, they are not necessarily functionally related. Any two sequences, y and x, that are monotonically related (if x increases then y either increases or decreases) will always show a strong statistical relation. A functional relationship may not exist, though. For example, a strong statistical relation may be found in the weekly sales of hot chocolate and facial tissue. But this does not necessarily mean that hot chocolate causes people to need facial tissue or vice versa. If these two variables are modeled, they may show a strong statistical relationship but it would be a “nonsense” regression model. Listing the tissue and hot chocolate sales would likely exhibit a correlation because both tend to go down during summer and go up during winter. In this case, ambient temperature remains a hidden variable; a statistical model without considering ambient temperature is of no use.
To avoid model misspecification, first ask: Is there any functional relationship between the variables under consideration? To answer this question, analysts must rely on the theory behind the functional relationship that is to be modeled through regression. A proper understanding of the theory behind the functional relationship leads to the identification of potential predictors. From there, regression can be used to convert the functional relationship into a mathematical equation.
In the ordinary least square (OLS) method, all points have equal weight to estimate the intercept (β_{o}) of the regression line, but the slope (β_{i}) is more strongly influenced by remote values of the predictor variable. For example, consider the scenario shown in Figure 1. Points A and B play major roles in estimating the slope of the fitted model. The estimated slope of the fitted model will be different if points A and B are deleted.
Another situation is shown in Figure 2, where point A is far away in the xy plane and the fitted model would be based on two distinct pieces of information: 1) point A and 2) the cluster of remaining points. In such cases, the estimated slope of the fitted model is highly influenced by point A. In fact, without point A the estimated slope of the model might be zero.
In these cases, further analysis and the possible deletion of these outlying points may be required. Or it may be necessary to estimate the slope of the model with techniques other than OLS where these points carry less weight in determining slope. Practitioners can also look again at the theory behind the model to explore the possibility of adding other predictors.
When using multiple linear regression, it may sometimes appear that there is a contradiction between intuition or theory and the sign of an estimated regression coefficient (β). For example, a theory or intuition may lead to the thought that a particular coefficient (β) should be positive in a particular problem. But after fitting the model there may be a negative sign for that coefficient. In such a scenario it is difficult for the analyst to explain the negative coefficient as the users of the model might believe the coefficient should be positive.
One of the factors that plays an important role in determining the sign of regression coefficients is the range of predictor variables. The variance of the regression coefficient (slope of regression line) is inversely proportional to the spread of the predictor variable. If all values of the predictor variable are close together, then the variance of the sampling distribution of the slope will be higher. In some cases the variance will be so high that an analyst will discover a negative estimate of a coefficient that is actually positive. This scenario is depicted in Figure 3, where the region shown in red shows the probability of the regression coefficient being negative where it should be positive.
In some cases an analyst can control the levels of the predictor variable and by increasing the spread of the predictor variable it is possible to reduce the variance of the regression coefficients. If the predictor variable covers too far a range, however, and the true relationship between the response and predictor is nonlinear then the analyst must develop a complex equation to adequately model the true relationship. It is important to note that increasing the range of the predictor variable beyond a certain level is not feasible given the practical constraints of the experiment. In general, regression analysis always involves a tradeoff among the precision of estimation, the complexity of a model and the practical constraints of the experiment to decide the range of predictor variables.
R^{2} is often called the coefficient of determination; it is sometimes interpreted as a measure of the influence of predictor variables on response variables. A high R^{2} is considered proof that a correct model has been specified and that the theory being tested is correct. A higher R^{2} in one model is taken to mean that the model is better that another model with a lower R^{2}. Unfortunately, all these interpretations are wrong.
R^{2} is simply a measure of the spread of points around a regression line estimated from a given sample; it is not an estimator because there is no relevant population parameter. All calculated values of R^{2} refer only to the sample from which they come. If the goal of an analyst is to get a big R^{2}, then the analyst’s goal does not coincide with the purpose of regression analysis. R^{2} can be increased several ways (e.g., increasing the number of predictor variables), but such strategies will likely destroy most of the desirable properties of regression analysis. A high R^{2} value is not a sufficient criterion to conclude that the correct model has been specified and the functional relationship being tested is true.
R^{2} value can be useful, however, when comparing two different models with the same response variable but different predictor variables. The measure of R^{2}, in this case, becomes a goodnessoffit statistic, providing a rough way to assess model specification. For a single equation, R^{2} can be considered a measure of how much variability in the response variable has been explained by the regression equation fitted from a given sample.
How can you tell what good regression coefficients are and how can you tell how good a regression is as a whole? Standard errors are estimates of variance of regression coefficients across a sample. If they are small relative to the coefficients, then an analyst can be more confident that similar results would have emerged if a different sample were considered. Similarly, the use of an Ftest will show if estimated regression coefficients are significant. R^{2} is associated with, but a poor substitute for, a test statistic.
There are also varieties of indirect uses of R^{2}. It is often true that a high R^{2} results in small standard errors and high coefficients. Thus, a high R^{2} is good news for the analyst; R^{2} does not always mislead. The information provided by R^{2}, however, is already available in other commonly used statistics, and these statistics are more accurate – the intent of regression is to model the population rather than sample.
In addition to the more common conceptual mistakes that can be committed in regression analysis and the remedies already provided, there are two more general rules that apply to all types of statistical analysis:


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Comments
This would have been more powerful with a concrete example.
Very good article and explanation of the mistakes that are often made in regression models. Another mistake that is often made is ignoring the residuals and understanding why certain data do not fit the model. This is akin to ignoring outliers on a control chart. Both are missed opportunities of learning what is driving the process.
Robert Ballard
MBB – Global Productivity Solutions
Just because a regression analysis indicates a strong relationship between two variables, they are not necessarily functionally related. Any two sequences, y and x, that are monotonically related (if x increases then yeither increases or decreases) will always show a strong statistical relation. A functional relationship may not exist, though. For example, a strong statistical relation may be found in the weekly sales of hot chocolate and facial tissue. But this does not necessarily mean that hot chocolate causes people to need facial tissue or vice versa.
Regression is a correlation model, not a causal model. There are two uses of correlation models: (A) as a precursor to finding causal factors and (B) simply to find predictors (noncausal factors).
By not distinguishing these two cases, readers may think correlation is causation. Regression is not meant to show causation. That’s what control studies are for.
Case (A): Correlation models as a precursor to finding root causes.
A typically approach to determining root causes and their optimal settings consists of four steps;
1. Identify plausible factors (based on scientific laws, R&D history, and subject matter expertise)these are the Xs.
2. Collect historical data on these factors and the variable they are suppose to effectthe Y.
3. Determine the X factors which are most highly correlated with the Y variable, e.g., through various types of regression or hypothesis testing (since all statistical tests between variables are tests of association).
4. Do controlled studies (DOEs) on the correlated factors to determine which are actually causally related to Y and what their optimal levels are.
Case (B): Regression and other correlation models as just prediction models.
These models are useful for forecasting, where we cannot or should not control the factors. In other words, we do not control the Xs to get the Y value we want. We only monitor the Xs and then predict the Y value and have action plans for various values. For example, we cannot cause customer demand to be what we want. Instead, we create correlation (not causal models) using predictors (not root causes), to predict demand. Based on what the model predicts, we adjust our resources, schedule, budgets, increase sales force and marketing, etc.
The author gives the following advice: To avoid model misspecification, first ask: Is there any functional relationship between the variables under consideration? This is true if you are looking for causal factors but not for prediction/forecasting models.
Know why you are using a correlation model is the first question–which case A or B.
I agree with Chris: a concrete example would be great!
Very good article. That is why before constructing any statistical model it is necessary to understand the mechanism of data generation which will help in building sensible & logical model.
Very good article for basic understanding of Linear Regression. Also because it has been written in lucid language. Still I would request the author
1) To mention that the distribution of regression coefficients as normal (he used the knowledge)
2) To show us with example rather than telling us that regression coefficients may have estimate with wrong sign.