Econometric analysis and managerial decision making

Econometric analysis is concerned with the quantitative relationships between economic variables and it can provide an important input into the decision making process of managers. Typically econometrics differs from other apsects of management science in that it considers problems primarily, though not exclusively, from a background of economics rather than of other disciplines and behaviour is usually dealt with at higher levels of data aggregation than the individual firm. This paper considers some applications of typical econometrics to the general area of managerial decision making, where primarily the techniques have a role to play in assisting the general process of data analysis. Initially discussion is pointed towards the use of the analysis for predictive purposes and the contrast with time series methods. Subsequently examples are presented where the objective is to obtain a better understanding of individual economic relationships that aim to be important inputs into the decision making process, for example cost and revenue analysis. Finally, an example is given of how these ideas contribute more generally to the activity of model building for the firm as a whole both for the purpose of forecasting and policy simulation.