During the course of operation, businesses accumulate all kinds of data such as numbers related to sales performance and profit, and information about clients. Firms often seek out employees with strong math skills because data analysis provides insight that improves business decisions. Linear regression is a common type of statistical method that has several applications in business.

Evaluating Trends and Sales Estimates

Linear regressions can be used in business to evaluate trends and make estimates or forecasts. For example, if a company's sales have increased steadily every month for the past few years, conducting a linear analysis on the sales data with monthly sales on the y-axis and time on the x-axis would produce a line that depicts the upward trend in sales. After creating the trend line, the company could use the slope of the line to forecast sales in future months.

Analyzing the Impact of Price Changes

Linear regression can also be used to analyze the effect of pricing on consumer behavior. For instance, if a company changes the price of a certain product several times, it can record the quantity it sells for each price level and then performs a linear regression with quantity sold as the dependent variable and price as the explanatory variable. The result would be a line that depicts the extent to which consumers reduce their consumption of the product as prices increase, which could help guide future pricing decisions.

Assessing Risk

Linear regression can be used to analyze risk. For example, a health insurance company might conduct a linear regression plotting number of claims per customer against age and discover that older customers tend to make more health insurance claims. The results of such an analysis might guide important business decisions made to account for risk.

There are cases where management can misuse regression to make business decisions. One example is the VAM in New York. See the link below:

https://www.washingtonpost.com/news/answer-sheet/wp/2016/05/10/a-master-teacher-went-to-court-to-challenge-her-low-evaluation-what-her-win-means-for-her-profession/

Can you think of other instances where the use of regression analysis should be limited in an applied business setting? What lessons can be learned from the VAM example in New York?