Customer and Business Analytics

Chapter 5

Logistic Regression

In the last chapter we provided an introduction to linear regression, the first predictive modeling tool created, and one that is still extremely powerful. Unfortunately, the method does have its limitations. One important one is that categorical target variables (variables with a nominal or ordinal scale) violate the assumptions underlying linear regression. However, in a pinch, a reasonable predictive model for a binary target variable (typically of the “Yes/No” variety) can be created using linear regression (assuming the values of “Yes” and “No” have been converted to values of 1 and 0). The same is true for an ordinal target variable, assuming the categories of the variable have been given numerical values that ...