Case Detail

Case Summary

Practical Regression: Maximum Likelihood Estimation

Case Number: 7-112-008, Year Published: 2012

HBS Number: KEL642

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Key Concepts

Economics, Market Research, Statistical Methods

Abstract

This is the eighth in a series of lecture notes which, if tied together into a textbook, might be entitled “Practical Regression.” The purpose of the notes is to supplement the theoretical content of most statistics texts with practical advice based on nearly three decades of experience of the author, combined with over one hundred years of experience of colleagues who have offered guidance. As the title “Practical Regression” suggests, these notes are a guide to performing regression in practice.This technical note discusses maximum likelihood estimation (MLE). The note explains the concept of goodness of fit and why MLE is a powerful alternative to R-squared. The note follows a simple example that develops the intuition of MLE as well as the computation of the likelihood score and the algorithm used to estimate coefficients in MLE models.

Learning Objectives

Students will learn the following:
- The limits of R-squared as a measure of goodness of fit
- The virtues of the likelihood score as an alternative to R-squared
- The intuition behind MLE
- How to interpret the likelihood score

Number of Pages: 4

Extended Case Information

Teaching Areas: Finance