From the course: Regression Analysis Fundamentals
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Using functional forms
From the course: Regression Analysis Fundamentals
Using functional forms
- Form matters. Not all relationships consist of straight lines. For example, age is a measure that will often exhibit quadratic relationships with other variables. Productivity over the life cycle will increase when you're young, pick at middle age, and then decline as you get older. But linear regression does not imply straight lines. Today, I'm going to walk you through how linear regression can be used outside of traditional linear form. First, linear regression is very flexible and able to fit many kinds of non-linear relationships. This is called functional form. Let me show you what this means here. I'll start with a simple data example. Here is a graph with a regression through raw data on the left panel and residuals from this regression on the right panel. I'm interested in the relationship between a car price and its mileage. On the right panel, you can see how far individual data points are from the…
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