How to Create Dummy Variables in Excel

This guide will explain how to create dummy variables in Excel

Excel is an excellent tool to use for statistical calculations. Since it has built-in functions and tools, we can utilize them to perform long and complex data analysis and statistical calculations.

For instance, we can efficiently perform a regression analysis in Excel with the help of the functions and tools. Specifically, we can use dummy variables when performing regression analysis.

So dummy variables are categorical variables that are numerically expressed as 1 or 0. And these numbers indicate the presence or absence of a specific characteristic or trait.  

Furthermore, we do not need to use any special functions in Excel to perform a regression analysis that includes dummy variables among the independent variables. But, we do need to use additional add-ins or programs that expand Excel’s tools and features. 

Let’s take a sample scenario wherein we need to create dummy variables in Excel. 

Suppose you have surveyed the average income depending on age and educational attainment. And you want to determine if educational attainment can be a predictor variable in a regression model. To do this, you converted the educational attainment into dummy variables.

Afterward, you used the IF function to define the dummy variables in the data set. Lastly, you performed a linear regression using the data analysis feature in Excel. 

Before we continue on to a real example of creating dummy variables in Excel, let’s first understand how to write the IF function in Excel.

 

The Anatomy of the IF Function

The syntax or the way we write the IF function is as follows:

=IF(logical_test, [value_if_true], [value_if_false])

Let’s take apart this formula and understand what each term means:

  • = the equal sign is how we begin any function in Excel.
  • IF() is our IF function. And this function is used to check whether a condition we set is met. Then, the function will return a value if TRUE. Otherwise, it will return another value if FALSE.
  • logical_test is the only required argument. So this refers to any value or expression that will be evaluated as TRUE or FALSE.
  • value_if_true is an optional argument. And this refers to a value we want to be returned if the logical test evaluation is true. If left blank or omitted, the function will return TRUE.
  • value_if_false is another optional argument. So this refers to another value we want to return if the evaluation is FALSE. When omitted, the function will return FALSE.

Great! Now we can move on and dive into a real example of creating dummy variables in Excel.

 

A Real Example of Creating Dummy Variables in Excel

Let’s say we have a data set containing income, age, and educational attainment. And we want to use age and educational attainment to predict the possible income of an individual. So our initial data set would look like this:

Initial data set

 

To utilize educational attainment as a predictor variable in our regression model, we need first to convert it into dummy variables. So we will use the formula k-1 to determine the number of dummy variables.

Since educational attainment is a categorical value that takes on three different values: college graduate, high school graduate, and master’s graduate. Using the formula k - 1 = 3-1 = 2 dummy variables. 

Additionally, we will let college graduates be our baseline value since it occurs the most often in our data set. So this would set all the dummy variables to 0 if they were a college graduate. Otherwise, the dummy variable would be 1. 

Firstly, we must create a new data set to represent these factors. So the first two columns would consist of income and age. Then, we will create two separate columns for the categorical values of high school graduates and master’s graduates. 

Secondly, we will use the IF function to define the two dummy variables. Afterward, we will perform a linear regression using the data analysis tool in Excel. If we do not see this option in the ribbon, we would first need to load the analysis toolpak to add the tool in. 

Next, we can simply choose regression in the data analysis window, and it will produce a regression analysis output. Then, we can interpret the regression coefficients from the output to decide whether educational attainment can be used as a predictor variable for income. 

To interpret the values, we need to refer to the p-value of each categorical variable. For example, age has a p-value of 0.003, which is less than 0.05, meaning age is a statistically significant predictor for income. If the p-value is not less than 0.05, the variable is not statistically significant.

So our final data set would look like this:

Final data set

 

You can make your own copy of the spreadsheet above using the link attached below. 

Amazing! Now we can learn the steps of how to create dummy variables in Excel.

 

How to Create Dummy Variables in Excel

In this section, we will discuss the step-by-step process of how to create dummy variables in Excel. Additionally, each step has detailed instructions and pictures to help you follow the process.

1. Firstly, we need to prepare the data set. To do this, we will copy the values in columns B and C and paste them into new columns. Then, we will create two new columns for the categorical variables: high school graduates and master’s graduates.

Copy the dataset

 

2. Secondly, we will use the IF function to determine the dummy variables. In this case, we will type in the formula “=IF(D2 = “high school graduate”, 1, 0)” in the first row of column H.

Create Dummy Variables in Excel

 

3. Thirdly, we will drag the Fill Handle tool down to copy the formula and apply it to the rest of the rows.

Copy formula down

 

4. Next, we will input the formula “=IF(D2 = “master’s graduate”, 1, 0)” in cell. Lastly, we will press the Enter key to return the results.

Create Dummy Variables in Excel

 

5. Thirdly, we will drag the Fill Handle tool down to apply the formula to the rest of the cells.

Create Dummy Variables in Excel

 

6. Next, we will perform linear regression. To do this, we can simply go to the Data tab. Then, we can click Data Analysis which is found in the Analysis section.

Create Dummy Variables in Excel

 

7. If we cannot find the Data Analysis tool, we need to first load the Analysis Toolpak. To do this, we will go to the File tab and select More. Then, we can click Options.

Create Dummy Variables in Excel

 

8. Afterward, we will select Add-Ins and click Analysis ToolPak. Lastly, we will click OK to apply the changes.

Create Dummy Variables in Excel

 

9. Then, we will check the box beside Analysis ToolPak and click OK.

Create Dummy Variables in Excel

 

10. In the Data Analysis window, we will select Regression and click OK.

Create Dummy Variables in Excel

 

11. Next, we will input the following information in the Regression window. First, we will input the range containing our data set. Then, we will check the box beside Labels. Next, we will input the cell location for the output. Finally, we will press OK to apply the changes.

Create Dummy Variables in Excel

 

12. And tada! We have successfully created dummy variables in Excel.

Create Dummy Variables in Excel

 

And that’s pretty much it! We have successfully discussed how to create dummy variables in Excel. Now you can apply this method whenever you need to perform regression analysis using dummy variables. 

Are you interested in learning more about what Excel can do? You can now use the IF function and the various other Microsoft Excel formulas available to create great worksheets that work for you. Make sure to subscribe to our newsletter to be the first to know about the latest guides and tutorials from us.

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