The Professor Proposes

ECO404 | April 2nd, 2014

Alejandro Bilbao, Alex Trivanovic, Lisa Guo

Agenda
1. Overview and Issue Statement
2. Analysis
3. Recommendation

Problem Statement

What is the fair price of the ring?

Budget: $2,000 - $4,000
Overview

Analysis

Recommendation

Characteristics of Diamonds
Polish

Carat

Symmetry

Colour
Clarity
Cut

Certification
Wholesaler

4
Overview

Analysis

Recommendation

Characteristic Measurements
Carat

1 carat = 0.2 kg

Colour

Colourless | D E F | G H I | J K | L M N | O P Q R S | T U V W X Y Z | Yellow

Clarity

Flawless | FL | IF | VVS 1 2 | VS 1 2 | SI 1 3 | I 1 -3 | Included

Cut
Polish

Poor | Fair | Good | Very Good | Excellent | Ideal

Symmetry
Certification

GIA | AGS | EGL | IGI

Wholesaler

1|2|3

Overview

Analysis

Recommendation

The Engagement Ring

$3,100

Overview

Analysis

Characteristic

Diamond Rating

Carat Weight

0.9

Cut

Very Good

Color

J (Faint Yellow)

Clarity

S12 (Few inclusions at 10x)

Polish

Good

Symmetry

Very Good

Certification

GIA

Recommendation

Analysis: Overview

Overview

Analysis

Recommendation

Analysis: Comparable Rings

Characteristic

The Diamond

Comparable Set

Carat Weight

0.9

0.88 0.92

Cut

Very Good

Good Excellent

Color

J (Faint Yellow)

G- N (Nearly
Colorless Very
Light Yellow)

Clarity

S12 (Few
inclusions at 10x)

SI3 SI1

Polish

Good

Fair Very Good

Symmetry

Very Good

Good Excellent

Certification

GIA

GIA

Overview

Analysis

Recommendation

Estimated Price:
Point Estimate =
Max Estimate =
Min Estimate =

$ 2,899.39
$ 3,069.40
$ 2,638.69

Comparable Rings:

Methodology: Regressions
Carat
Colour
Clarity

Linear Regression
Multiple Regression
Spline Regression (Carat)

Cut

Price?

Polish
Symmetry
Certification

Non-Linear Regression
Logarithmic (Carat)
Quadratic (Carat)

Wholesaler

Overview

Analysis

Recommendation

Analysis: Continuous Variables

Number of Observations: 440
Average

Range

Std. Dev

Price

$1716.74

$160 - $3145

$1175.689

Carat

0.66925

0.09 1.58

0.3798

Carat Distribution

Overview

1000

Analysis

Price

2000

3000

Recommendation

50

50

Frequency

Frequency
100

100

150

150

Price Distribution

.5

Carat

1.5

10

Analysis: Discrete Variables

Clarity

VS2 ; 9% VVS1 ; 0% VVS2 ; 1%

VS1 ; 7%
I1 ; 19%
SI3 ; 6%
I2 ; 6%
SI2 ; 25% SI1 ; 26%

Overview

Analysis

Colour

K ; 7% L ; 3% D ; 5%
E ; 12%
J ; 16%
F ; 13%
I ; 18%

F ; 13%
X ; 34%

G ; 10%
H ; 16%

Recommendation

Cut

G ; 11%

I ; 20%
V ; 22%

11

Analysis: Wholesaler
Average Price vs. Carat
3500
3000

Wholesaler
Number

3
200

2
180

1
60

Average Carat Size

0.27

1.06

0.84

Average Price

468

2662

3043

Range of Color

D - K (Colorless Faint yellow)

D - L (Colorless Very light yellow)

D - J (Colorless Faint yellow)

Range of Cut

Fair - Ideal

Fair - Ideal

Fair - Ideal

Range of Clarity

I1 - VVS2

I1 - VS2

SI1 - VS2

Range of Polish

Good - Excellent

Fair - Excellent

Good - Ideal

Range of Symmetry

Good - Excellent

Fair - Excellent

Good - Ideal

Certification

GIA, IGI

EGL, DOW, GIA

AGS, GIA

2500
2000

1
2
3

Price 1500
1000
500
0

Carats

Overview

Analysis

Recommendation

12

The Price and Carat Relationship

Fitted Lines of Price vs. Carat

1000

Price

2000

3000

Scatterplot of Price vs. Carat

Overview

.5

Carat

Analysis

1.5

Recommendation

13

Creating the Best Model

Find the best price and
carat relationship

Find the optimal division

of discrete variables

Spline

Linear

Colour

Cut
Symmetry

Quadratic

Clarity
Certification

Logarithmic

Polish
Wholesaler

Use entire scale? Dummy for a portion of the scale?

Optimal Model for

Predicting Price

Overview

Analysis

Which regression gives the best

results?
Recommendation

14

Comparison of Models
Linear

Spline

Quadratic

Logarithmic

Constant

303.33

-144.86

467.10

1816.59

Carat

1510.94

1812.96

Carat: 1071.99

lnCarat: 285.66

Carat-Sq: 232.150

Discrete Variables
Full Scale Significant
Colour

Clarity

Wholesaler

(-)

(+)

(-) for 3, (+) for 2

Partial Scale Significant

Certificate

Cut

GIA/AGS vs. EGL/DOW

Poor to Very Good vs. Excellent

No Significance

Polish
Overview

Analysis

Wholesaler
Recommendation

15

Comparison of Models
Linear

Spline

Quadratic

Logarithmic

R2

0.9818

0.7057

0.9820

0.9784

MSE

161.75

206.25

161.52

176.75

Advantages

Disadvantages

Overview

Analysis

Simple

Does not
capture nonlinearity
Wholesaler
is
insignificant

Captures
carat gap
Worst fit
Insignificant
constant
Does not
capture nonlinearity
Reduces
sample size

Recommendation

Best fit
Captures nonlinearity

Carat-squared
coefficient
insignificant
Wholesaler is
insignificant

Captures nonlinearity
All variables
significant

Lower R2 than
linear

16

Example Model: Logarithmic

Variable
lnCarat

Coefficient
285.6625
Scale For Colour

2
3
4

-102.9674
-242.1503
-554.7601
Scale For Clarity

3
4
5
6
7
8
9
10

426.3774
602.8649
867.3755
930.583
952.4909
1003.027
950.4456
1054.666
Wholesaler

2
3

208.7881
-2193.272
New Scale For Symmetry

3
4
5

188.6193
192.0782
182.9909
Dummies and Constant

Dummy cut
dummy_bestlab
_Constant

Overview

Analysis

46.78337
239.6189
1816.598

Recommendation

17

The Results
Model

Predicted Price

Lower 95% CI

Upper 95% CI

Lower 95% PI

Upper 95% PI

Logarithmic
(Wholesaler)

$2,831.08

$2,754.77

$2,907.38

$2,474.99

$3,187.16

Quadratic
(Wholesaler)

$2,861.20

$2,793.53

$2,928.86

$2,536.10

$3,186.29

Linear (Wholesaler)

$2,857.23

$2,789.67

$2,924.80

$2,531.68

$3,182.79

Logarithmic (No
Wholesaler)

$2,384.86

$2,282.44

$2,487.27

$1,691.66

$3,078.05

Quadratic (No
Wholesaler)

$2,615.68

$2,552.07

$2,679.29

$2,190.49

$3,040.87

Linear (No
Wholesaler)

$2,584.29

$2,515.65

$2,652.94

$2,122.67

$3,045.91

Overview

Analysis

Recommendation

$3,100
18

Youre paying too much!

$3,100

$2,000

$4,000

Too high!
$2,899 (Comparable)
$2,861 (Quadratic)
$2,857 (Linear)
$2,831 (ln)

Overview

Analysis

Recommendation

19

Recommendation

Overview

Characteristic

Original Ring

Ring A

Ring B

Price

$3,100

$3,006

$3,064

Carat Weight

0.9

0.9

0.9

Cut

Very Good

Very Good

Good

Color

J (Faint Yellow)

J (Faint Yellow)

J (Faint Yellow)

Clarity

S12 (Few inclusions

at 10x)

VS2 (Very Slightly

Included)

VS2 (Very Slightly

Included)

Polish

Good

Very Good

Excellent

Symmetry

Very Good

Very Good

Excellent

Certification

GIA

GIA

AGS

Analysis

Recommendation

20

Thank-you,
Questions?

Appendix
Link to spreadsheet for comparability

22

Appendix: Comparable Diamonds

Comparable Diamonds

Carat
0.91
0.9
0.91
0.9
0.9
0.9
0.9
0.92

Dummy_C
olour
3
2
2
2
2
2
2
3

Colour
J
I
H
H
I
I
I
J

Scale for
Clarity
6
6
5
5
5
5
6
6

Clarity
SI1
SI1
SI2
SI2
SI2
SI2
SI1
SI1

Scale for
Cut
4
4
3
4
3
4
3
4

Cut
V
V
G
V
G
V
G
V

Dummy_B Certificatio Scale for

est LAB
n
Polish
1
GIA
4
1
GIA
5
1
GIA
4
1
GIA
4
1
GIA
4
1
GIA
4
1
GIA
4
1
GIA
4

Polish
V
X
V
V
V
V
V
V

Scale for
Symmetry Symmetry
4
V
4
V
3
G
3
G
4
V
4
V
3
G
4
V

Price
3023
3028
3038
3043
3069
3069
3081
3091

Wholesale
r
1
1
1
1
1
1
1
1

Polish
V
X

Scale for
Symmetry Symmetry
4
V
5
X

Price
3006
3064

Wholesale
r
1
1

Recommended Diamonds

Carat
0.9
0.9

Dummy_C
olour
3
3

Colour
J
J

Scale for
Clarity
7
7

Clarity
VS2
VS2

Scale for
Cut
4
3

Cut
V
G

Dummy_B Certificatio Scale for

est LAB
n
Polish
1
GIA
4
2
AGS
5

23

Appendix: Results
Carat Graphs

24

Appendix: Final Quadratic Regression

Source

Model
Residual

SS

597723839
10990755.2

df

Final Quadratic Regression

MS
Number of obs

20
420

29886191.9
26168.4649

441

F( 20, 420)

1142.07

Prob > F
R-squared

=
=

0
0.9819

Adj R-squared

0.9811

Total

608714594

440

1383442.26

Root MSE

161.77

price

Coef.

Std. Err.

P>|t|

[95% Conf.

Interval]

carat
caratsqr

1071.998
232.1507

319.2041
153.1811

3.36
1.52

0.001
0.13

444.5618
-68.94634

1699.435
533.2477

22.64757
30.06927
55.57112

-5.51
-10.13
-11.91

0
0
0

-169.2094
-363.6264
-770.9362

-80.17596
-245.4164
-552.4719

558.1136
776.4684
1058.521
1136.534
1158.617
1223.329
1156.878
1295.136

41.78554
55.5983
51.4329
57.30882
62.15503
67.64517
91.44662
131.6794

13.36
13.97
20.58
19.83
18.64
18.08
12.65
9.84

0
0
0
0
0
0
0
0

475.9788
667.1829
957.4235
1023.886
1036.443
1090.363
977.1281
1036.303

640.2485
885.754
1159.619
1249.182
1280.791
1356.294
1336.628
1553.968

63.46869
-1760.534

52.78531
103.3932

1.2
-17.03

0.23
0

-40.28761
-1963.767

167.225
-1557.302

scaleforcolour
2
3
4

-124.6927
-304.5214
-661.7041
scaleforclarity

3
4
5
6
7
8
9
10
wholesaler
2
3

25

Appendix: Final Linear Regression

Source

Model
Residual

SS

595816375
10989146.4

df

19
420

Final Linear Regression

MS
Number of obs

31358756.6
26164.6343

440

F( 19, 420)

1198.52

Prob > F
R-squared

=
=

0
0.9819

Adj R-squared

0.9811

Total

606805521

439

1382244.92

Root MSE

161.75

price.

Coef

Std. Err.

P>|t|

[95% Conf.

Interval]

carat

1510.937

137.2017

11.01

1241.25

1780.625

22.27041
30.1648
55.57713

-5.93
-10.44
-11.91

0
0
0

-175.8473
-374.2841
-771.3645

-88.29659
-255.6985
-552.8765

538.7522
750.2744
1039.661
1123.757
1148.799
1217.562
1141.67
1283.091

39.42788
52.12226
49.18782
55.9773
61.28565
67.16188
90.46201
130.9818

13.66
14.39
21.14
20.08
18.74
18.13
12.62
9.8

0
0
0
0
0
0
0
0

461.2517
647.8214
942.9764
1013.726
1028.334
1085.547
963.8552
1025.63

616.2528
852.7274
1136.346
1233.788
1269.264
1349.577
1319.485
1540.553

56.39354
-1657.753

51.97516
81.22857

1.09
-20.41

0.279
0

-45.77031
-1817.418

158.5574
-1498.087

scaleforcolour
2
3
4

-132.0719
-314.9913
-662.1205
scaleforclarity

3
4
5
6
7
8
9
10
wholesaler
2
3

newscaleforsymmetry

26

Appendix: Final Logarithmic Regression

Source

Model
Residual

SS

595495210
13219384

df

Final Logarithmic Regression

MS
Number of obs

19
421

31341853.2
31399.962

441

F( 19, 421)

998.15

Prob > F
R-squared

=
=

0
0.9783

Adj R-squared

0.9773

Total

608714594

440

1383442.26

Root MSE

177.2

price

Coef.

Std. Err.

P>|t|

[95% Conf.

Interval]

lncarat

285.6625

50.72263

5.63

185.9614

385.3637

24.40753
31.89968
59.5737

-4.22
-7.59
-9.31

0
0
0

-150.9432
-304.8527
-671.8591

-54.99155
-179.4478
-437.6611

426.3774
602.8649
867.3755
930.583
952.4909
1003.027
950.4456
1054.666

42.67159
56.97219
51.47011
57.97386
63.65608
69.42115
97.47485
141.445

9.99
10.58
16.85
16.05
14.96
14.45
9.75
7.46

0
0
0
0
0
0
0
0

342.5015
490.8795
766.2051
816.6287
827.3676
866.572
758.8476
776.6392

510.2533
714.8503
968.5459
1044.537
1077.614
1139.482
1142.044
1332.692

208.7881
-2193.272

53.14136
62.87429

3.93
-34.88

0
0

104.3326
-2316.859

313.2435
-2069.685

scaleforcolour
2
3
4

-102.9674
-242.1503
-554.7601
scaleforclarity

3
4
5
6
7
8
9
10
wholesaler
2
3

newscaleforsymmetry

27