Multivariate Methods for Data

Analysis
AQ049-3-M (VD1)

Logistic Regression
 Logistic Regression: Regression with a
Binary Dependent Variable

LEARNING OBJECTIVES
Upon completing this chapter, you should be able to
do the following:
• State the circumstances under which logistic
regression should be used instead of multiple
regression.
• Identify the types of dependent and independent
variables used in the application of logistic
regression.
• Describe the method used to transform binary
measures into the likelihood and probability
measures used in logistic regression.

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Chapter 7
Logistic Regression: Regression with a
Binary Dependent Variable

LEARNING OBJECTIVES continued . . .

Upon completing this chapter, you should be able to
do the following:
• Interpret the results of a logistic regression
analysis and assessing predictive accuracy, with
comparisons to both multiple regression and
discriminant analysis.
• Understand the strengths and weaknesses of
logistic regression compared to discriminant
analysis and multiple regression.

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Logistic Regression Defined
Logistic Regression . . . is a specialized
form of regression that is designed to predict
and explain a binary (two-group) categorical
variable rather than a metric dependent
measure. Its variate is similar to regular
regression and made up of metric
independent variables. It is less affected than
discriminant analysis when the basic
assumptions, particularly normality of the
independent variables, are not met.

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Logistic Regression May Be Preferred . . .

When the dependent variable has only two groups, logistic

regression may be preferred for two reasons:
• Discriminant analysis assumes multivariate normality and equal
variance-covariance matrices across groups, and these
assumptions are often not met. Logistic regression does not
face these strict assumptions and is much more robust when
these assumptions are not met, making its application
appropriate in many situations.
• Even if the assumptions are met, some researchers prefer
logistic regression because it is similar to multiple regression. It
has straightforward statistical tests, similar approaches to
incorporating metric and nonmetric variables and nonlinear
effects, and a wide range of diagnostics.

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Logistic Regression Decision Process

Stage 1: Objectives of Logistic Regression

Stage 2: Research Design for Logistic Regression
Stage 3: Assumptions of Logistic Regression
Stage 4: Estimation of the Logistic Regression Model
and Assessing Overall Fit
Stage 5: Interpretation of the Results
Stage 6: Validation of the Results

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Stage 1: Objectives of Logistic Regression

Logistic regression is best suited to

address two research objectives . . .
• Identifying the independent variables that
impact group membership in the dependent
variable.
• Establishing a classification system based on
the logistic model for determining group
membership.

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Stage 2: Research Design for
Logistic Regression
• The binary nature of the dependent variable (0 – 1)
means the error term has a binomial distribution
instead of a normal distribution, and it thus invalidates
all testing based on the assumption of normality.
• The variance of the dichotomous variable is not
constant, creating instances of heteroscedasticity as
well.
• Neither of the above violations can be remedied
through transformations of the dependent or
independent variables. Logistic regression was
developed to specifically deal with these issues.

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Stage 3: Assumptions of
Logistic Regression

• The advantages of logistic regression are

primarily the result of the general lack of
assumptions.
• Logistic regression does not require any specific
distributional form for the independent variables.
• Heteroscedasticity of the independent variables is
not required.
• Linear relationships between the dependent and
independent variables are not required.

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Stage 4: Estimation of Logistic
Regression Model and Assessing Overall
Fit
• Transforming the dependent variable
• Estimating the coefficients
• Transforming a probability into odds and
logit values
• Model estimation
• Assessing the goodness of fit

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Estimating the Coefficients

Two basic steps . . .

1. Transforming a probability into odds and logit values
2. Model estimation using a maximum likelihood
approach, not least squares as in multiple
regression
• The estimation process maximizes the likelihood
that an event will occur – the event being a
respondent is assigned to one group versus
another

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Transforming a Probability
into Odds and Logit Values
o The logistic transformation has two basic steps:
 Restating a probability as odds, and
 Calculating the logit values.
o Instead of using ordinary least squares to
estimate the model, the maximum likelihood
method is used.
o The basic measure of how well the maximum
likelihood estimation procedure fits is the
likelihood value.

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Model Estimation Fit – Between
Model comparisons . . .

Comparisons of the likelihood values follow three

steps:
1. Estimate a Null Model – which acts as the
“baseline” for making comparisons of improvement
in model fit.
2. Estimate Proposed Model – the model containing
the independent variables to be included in the
logistic regression.
3. Assess – 2LL Difference.

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Comparison to Multiple Regression . . .

Correspondence of Primary Elements of Model Fit

Multiple Regression Logistic Regression
Total Sum of Squares -2LL of Base Model
Error Sum of Squares -2LL of Proposed Model
Regression Sum of Squares Difference of -LL for
Base and Proposed Models
F test of model fit Chi-square Test of -
2LL Difference
Coefficient of determination “Pseudo” R2 measures

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Stage 5: Interpretation of the Results

• Testing for significance of the coefficients –

based on the Wald statistic
• Interpreting the coefficients
• Directionality of the relationship
• Magnitude of the relationship of metric
independent variables
• Interpreting nonmetric independent variables

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Directionality of the Relationship
A positive relationship means an increase in the
independent variable is associated with an increase in the
predicted probability, and vice versa. But the direction of
the relationship is reflected differently for the original and
exponentiated logistic coefficients.
• Original coefficient signs indicate the direction of the
relationship.
• Exponentiated coefficients are interpreted differently
since they are the logarithms of the original coefficients
and do not have negative values. Thus, exponentiated
coefficients above 1.0 represent a positive relationship
and values less than 1.0 represent negative
relationships.

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Magnitude of the Relationship . . .
The magnitude of metric independent
variables is interpreted differently for original and
exponentiated logistic coefficients:
• Original logistic coefficients – are less useful in
determining the magnitude of the relationship
since the reflect the change in the logit (logged
odds) value.
• Exponentiated coefficients – directly reflect the
magnitude of the change in the odds value. But
their impact is multiplicative and a coefficient of
1.0 denotes no change (1.0 times the
independent variable = no change).

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Rules of Thumb 7–5
Logistic Regression
• Logistic regression is the preferred method for two-
group (binary) dependent variables due to its
robustness, ease of interpretation and diagnostics.
• Sample size considerations for logistic regression are
primarily focused on the size of each group, which
should have 10 times the number of estimated model
coefficients (the number of variables).
• Sample size should be met in both the analysis and
holdout samples.
• Model significance tests are made with a chi-square
test on the differences in the log likelihood values (-
2LL) between two models.

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Rules of Thumb 7–5
continued . . .
Logistic Regression
• Coefficients are expressed in two forms: original and
exponentiated to assist in interpretation.
• Interpretation of the coefficients for direction and
magnitude is:
 Direction can be directly assessed in the original
coefficients (positive or negative signs) or indirectly in
the exponentiated coefficients (less than 1 are
negative, greater than 1 are positive).
 Magnitude is best assessed by the exponentiated
coefficient, with the percentage change in the
dependent variable shown by: Percentage change =
(Exponentiated Coefficient – 1.0) * 100

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Stage 6: Validation of the
Results

• Involves ensuring both the internal and

external validity of the results.
• The most common form of estimating external
validity is creation of a holdout or validation
sample and calculating the hit ratio.
• A second approach is cross-validation,
typically achieved with a jackknife or “leave-
one-out” process of calculating the hit ratio.

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 Description of HBAT Primary Database Variables
Variable Description Variable Type
Data Warehouse Classification Variables
X1 Customer Type nonmetric
X2 Industry Type nonmetric
X3 Firm Size nonmetric
X4 Region nonmetric
X5 Distribution System nonmetric
Performance Perceptions Variables
X6 Product Quality metric
X7 E-Commerce Activities/Website metric
X8 Technical Support metric
X9 Complaint Resolution metric
X10 Advertising metric
X11 Product Line metric
X12 Salesforce Image metric
X13 Competitive Pricing metric
X14 Warranty & Claims metric
X15 New Products metric
X16 Ordering & Billing metric
X17 Price Flexibility metric
X18 Delivery Speed metric
Outcome/Relationship Measures
X19 Satisfaction metric
X20 Likelihood of Recommendation metric
X21 Likelihood of Future Purchase metric
X22 Current Purchase/Usage Level metric
X23 Consider Strategic Alliance/Partnership in Future nonmetric

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression

 What we will cover next

 Grouping Data With Cluster Analysis

AQ049-3-M Multivariate Methods for Data Analysis Logistic Regression