## Tuesday, March 7, 2017

### Model with endogenous dichotomous variable

How do we interpret the results of a model with an endogenous dichotomous variable? Let us use the model below to illustrate the answer to this question. In this model we have one endogenous dichotomous variable “Success” that is significantly caused in a direct way by two predictors: “Projmgt” and “JSat”. The direct effect of a third predictor, namely "ECollab", is relatively small and borderline significant.

Let us assume that the unit of analysis is a team of people. The variable “Success” is coded as 0 or 1, meaning that a team is either successful or not. After standardization, the 0 and 1 will be converted into a negative and a positive number. The standardized version of the variable “Success” will have a mean of zero and a standard deviation of 1.

One way to interpret the results is the following. The probability that a team will be successful (i.e., that “Success” > 0) is significantly affected by increases in the variables “Projmgt” and “JSat”.

In version 6.0 of WarpPLS, users will be able to calculate conditional probabilities as shown below, without having to resort to transformations based on assumed underlying functions, such as those performed by logistic regression. In this screen shot, only latent variables are used, and they are all assumed to be standardized.

In the screen shot above, we can see that the probability that a team will be successful (i.e., that “Success” > 0), if “Projmgt” > 1 and “JSat” > 1, is 52.2 percent. Stated differently, if “Projmgt” and “JSat” are high (greater than 1 standard deviation above the mean), then the probability of success is slightly greater than chance.

A probability of 52.2 percent is not that high. The reason why it is not higher, in the context of the conditional probabilistic query above, is that we are not including the variable "ECollab" in the mix. Still, it does not seem like “Projmgt” and “JSat” being high are sufficient conditions for success, although they may be necessary conditions.

Consider a different set of conditional probabilities. If a team is successful (i.e., if “Success” > 0), what is the probability that “Projmgt” and “JSat” are low for that team. The answer, shown in the screen below, is 1.3 percent. That is a very low probability, suggesting that “Projmgt” and “JSat” matter as necessary but not sufficient elements for success.

These are among the conditional probabilistic queries that users will be able to make in version 6.0 of WarpPLS, which should be released in a few months. Bayes’ theorem is used to produce the answers to the queries.

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