USING DUMMY VARIABLES

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• USING DUMMY VARIABLES
• IN
• REGRESSION MODELS

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Qualitative Variables

• Qualitative variables can be introduced into
  regression models using dummy variables
• Dummy variables can take on only two values 0
  or 1
• Suppose you feel a persons income may be
  affected by his/her gender
• X 1 (male) X 0 (female) or vice versa
• Add a column of gender to the model
• Column of 1s and 0s

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Multiple Values

• It is felt that the starting salary for a
  business school graduate is affected by whether
  the graduate majored in MIS, accounting, finance,
  or another business discipline (Other).
• Use 3 dummy variables to represent business
  disciplines.
• x1 MIS
• x2 Accounting
• x3 Finance
• Use k-1 dummy variables if there are k choices
  for the qualitative variable.
• If the entries for x1, x2, and x3 were all 0,
  this indicates Other
• Never have more than one 1 for x1, x2, x3

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Example

• Suppose Bill is a business graduate who majored
  in accounting and received a staring salary of
  27,000.
• Ellen is a second business graduate who majored
  in marketing (Other) and received a starting
  salary of 29,000.
• The corresponding values for y and x1, x2, and x3
  for these graduate would be
• Bill y 27000 x1 0 x2 1 x3 0
• Ellen y 29000 x1 0 x2 0 x3 0

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Models with both Quantitative and Qualitative
Variables

• Many models include both quantitative and
  qualitative variables.
• Interpretation of coefficient of dummy variable
  (x) how y is affected if x goes from 0 to 1.
• There is no in-between interpretation for the
  dummy variable x

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Excel Example

• It is conjectured that starting salaries for
  business school graduates are a function of the
  major (MIS, Accounting, Finance, Other), gender
  (Male, Female), and college grade point average.
  A sample of 20 students is taken.
• Use 3 dummy variables for the 4 choices of major.
• Use 1 dummy variable for the 2 choices of gender.
• GPA is a quantitative variable.
• Use Excels IF statement to translate the
  qualitative responses into 0s and 1s.

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Review

• Dummy variables are regression variables that can
  only take on the values of 0 or 1.
• Multiple dummy variables can be used to represent
  different values of a qualitative variable.
• Use one less dummy variable than the number of
  possible values the qualitative variable all
  0s represent the last value.
• Dummy variables can be used with other
  quantitative variables in regression models.
• Excel Use of IF statement