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Lesson 7 Logistic Regression

Logistic regression can be used when the outcome is categorical. It is used to predict the probability of an outcome based on input variables. Some examples of logistic regression applications include predicting medical treatment success, loan default probability, and customer churn. Logistic regression models the log odds of the probability as a linear combination of the input variables. Maximum likelihood estimation is used to estimate the model parameters.

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46 views

Lesson 7 Logistic Regression

Logistic regression can be used when the outcome is categorical. It is used to predict the probability of an outcome based on input variables. Some examples of logistic regression applications include predicting medical treatment success, loan default probability, and customer churn. Logistic regression models the log odds of the probability as a linear combination of the input variables. Maximum likelihood estimation is used to estimate the model parameters.

Uploaded by

Gab Dy
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Introduction to

Data Science
LOGISTIC REGRESSION
Module Objectives
At the end of this module, students must be able to:
1. differentiate linear regression to logistic regression;
2. enumerate situations where logistic regression are applicable;
3. discuss in simple terms the theory and model behind logistic
regression;
4. implement logistic regression in a churn model example using R;
Introduction
In linear regression modeling, the outcome (dependent) variable is a continuous variable. As
an example, linear regression can be used to model the relationship between age and
education to income as follows

Suppose a person’s actual income was not of interest, but rather whether someone was
wealthy or poor. In such a case, when the outcome variable is categorical in nature, logistic
regression can be used to predict the likelihood of an outcome based on the input variables.

Although logistic regression can be applied to an outcome variable that represents multiple
values, our discussion will only examine the case in which the outcome variable represents
two values such as true/false, pass/fail, or yes/no
*Text taken from Data Science and Big Data Analytics by EMC Education Services
Introduction

For example, a logistic regression model can be built to determine if a person


will or will not purchase a new automobile in the next 12 months. The training
set could include input variables for a person’s age, income, and gender as
well as the age of an existing automobile.

The training set would also include the outcome variable on whether the
person purchased a new automobile over a 12-month period.

The logistic regression model provides the likelihood or probability of a person


making a purchase in the next 12 months.
*Text taken from Data Science and Big Data Analytics by EMC Education Services
Use cases
The logistic regression model is applied to a variety of situations in both the
public and the private sector. Some common ways that the logistic regression
model is used include the following:

Medical: Develop a model to determine the likelihood of a patient’s successful


response to a specific medical treatment or procedure. Input variables could
include age, weight, blood pressure, and cholesterol levels.

Finance: Using a loan applicant’s credit history and the details on the loan,
determine the probability that an applicant will default on the loan. Based on the
prediction, the loan can be approved or denied, or the terms can be modified.

*Text taken from Data Science and Big Data Analytics by EMC Education Services
Use cases
Marketing: Determine a wireless customer’s probability of switching carriers
(known as churning) based on age, number of family members on the plan,
months remaining on the existing contract, and social network contacts. With
such insight, target the high-probability customers with appropriate offers to
prevent churn.

Engineering: Based on operating conditions and various diagnostic


measurements, determine the probability of a mechanical part experiencing a
malfunction or failure. With this probability estimate, schedule the appropriate
preventive maintenance activity.

*Text taken from Data Science and Big Data Analytics by EMC Education Services
Model Description
Logistic regression is based on
the logistic function f(y), as given
in Equation 6-7.

Note that as
and as . As the figure on the right
shows, the value of the logistic
function varies from 0 to 1.

*Text taken from Data Science and Big Data Analytics by EMC Education Services
Model Description
Because the range of f(y) is (0,1), the logistic function appears to be an
appropriate function to model the probability of a particular outcome occurring.
As the value of y increases, the probability of the outcome occurring
increases.

In any proposed model, to predict the likelihood of an outcome, y needs to be


a function of the input variables. In logistic regression, y is expressed as a
linear function of the input variables. In other words, the formula shown in

*Text taken from Data Science and Big Data Analytics by EMC Education Services
Model Description
Then, based on the input variables x1, x2 ,..., xp −1, the probability of an event is
as shown

Equation 6-8 is comparable to the one used in linear regression modeling.


However, one difference is that the values of y are not directly observed.
Only the value of f(y) in terms of success or failure (typically expressed as 1 or
0, respectively) is observed.

*Text taken from Data Science and Big Data Analytics by EMC Education Services
Model Description
It can be shown that this equation

can be rewritten as follows

The quantity is known as the log odds ratio, or the logit of p.

*Text taken from Data Science and Big Data Analytics by EMC Education Services
Model Description
Techniques such as Maximum Likelihood Estimation (MLE) are used to
estimate the model parameters. MLE determines the values of the model
parameters that maximize the chances of observing the given dataset.
However, the specifics of implementing MLE are beyond the scope of this
book.

The next example will help to clarify the logistic regression model. The
mechanics of using R to fit a logistic regression model are covered in the next
section on evaluating the fitted model. In this section, the discussion focuses
on interpreting the fitted model.

*Text taken from Data Science and Big Data Analytics by EMC Education Services
Example – Customer Churn

 A wireless telecommunications company wants to estimate the probability


that a customer will churn (switch to a different company) in the next six
months.

 With a reasonably accurate prediction of a person’s likelihood of churning,


the sales and marketing groups can attempt to retain the customer by
offering various incentives.

*Text taken from Data Science and Big Data Analytics by EMC Education Services
Example – Customer Churn
 Data on 8,000 current and prior customers was obtained. The variables
collected for each customer follow:

*Text taken from Data Science and Big Data Analytics by EMC Education Services
Diagnostics

Please refer to demonstration on how to fit a logistic regression model.

Note: please see exact diagnostics procedure using R in . 181-183 of the


textbook.

*Text taken from Data Science and Big Data Analytics by EMC Education Services
Example – Customer Churn

 After analyzing the data and fitting a logistic regression model, Age and
Churned_contacts were selected as the best predictor variables. The
following equation provides the estimated model parameters.

*Text taken from Data Science and Big Data Analytics by EMC Education Services
Example – Customer Churn

 Using the fitted model from the


equation, the ff table provides the
probability of a customer churning
based on the customer’s age and the
number of churned contacts.

 The computed values of y are also


provided in the table.

 Recalling the previous discussion of


the logistic function, as the value of y
increases, so does the probability of
churning.
*Text taken from Data Science and Big Data Analytics by EMC Education Services
Example – Customer Churn

 Based on the fitted model,


there is a 93% chance that a
20-year old who had six
contacts churn will also churn.

 Likewise, there is only 3.4%


chance that a 50-year old who
had 3 contacts who churn will
also churn.

*Text taken from Data Science and Big Data Analytics by EMC Education Services

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