Step 1: Statistics Gives Level of or Change in Focal Variables

The Statistical Effect

Financial extrapolation needs to be based on one or more focal variables, although not necessarily all the variables in an analysis. Most important in financial extrapolation is to consider whether the focal variables can be valued with regard to revenue or cost, as we discuss later.
When considering statistics that focus on associations between multiple variables the focal variable would often be a dependent variable, which is a construct that we use other variables to explain or predict. In Chapter 8 we considered some simple association variables like correlation; in later chapters we considered techniques like regression, which seek to explain or predict certain variables.
There may also be other variables in the analysis, such as predictors of the focal variable in a regression.
The first step involves using statistics to assess either the level of a focal variable or the expected or actual change in the variable. What do I mean by this? There are, broadly, two extrapolation situations:
  1. Estimated level of a variable: Descriptive statistics like the average or median, estimate the level of a focal variable. In addition, more complex analyses can also lead to a final statistical conclusion that is the level of a variable.
  2. Estimated change in the focal variable: Some statistical analyses can also be used to predict expected change in a focal variable. A regression slope is an example: it measures the expected change in the dependent variable that is associated with a one-unit increase in the independent variable.
To illustrate the difference between static and change situations, let’s start with the simple example.

Example of Difference between Static & Change Situations

Say that you have a car dealership. The following are simple examples of static versus change analysis:
  • Analysis of level: Descriptive analysis may give average or median value of all cars in the dealership (or other data, such as spread). Alternately, perhaps a more complex analysis like a forecasting system suggests what a future month’s stock levels should be – this is still an analysis of the static level of a variable.
  • Change analysis: Say that a statistical analysis is used to assess the effect of various predictors of car sales. For instance, you may study predictors of sales like economic interest or exchange rates, local employment rates, and the like. From this analysis you may believe that changes in the interest and exchange rates, as well as local employment, will occur in the fourth quarter of this year. These expected changes in the predictors may suggest changes to your sales levels, which in turn might form the seed for the financial analysis.
It is particularly important to know whether you are dealing with a static versus a change situation, because the financial or other calculations come out slightly differently.
Last updated: April 18, 2017
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