INTRODUCTIONECONOMETRICS I

MAXIMA “Without data you are just one more

person with an opinion” (Anonymous)

Even the most beautiful theory is just aesthetics without empirical evidence… but you have to make sure that you interpret properly your data

INTRODUCTION You always need to make

assumptions… and you have to realize that you are doing them (and others are using them also): as in everything else there is no free lunch

Ideas and concepts are priority; maths is an instrument (mean) not the objective (Rubin)

Assumptions, assumptions Big “suprime” problem: pricing of

derivates on mortgages. Assumption/hypothesis?

Standard theory in physics: Assumption/hypothesis?

BASICS I

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BASIC PROBLEM I Endogeneity Circularity Egg and chicken Causality and correlation: two very

different concepts!!

BASIC PROBLEM I Interpretation of any graph/table

implies many assumptions. However, these assumptions are

almost never explicit. Assumptions for the interpretation of

the previous graph? Direction Omission

BASICS II 1936 US presidential election Sampling list: mail out ballot cards

to residential telephone subscribers and owners of cars.

Result of the poll: Landon (republican) will win with 57% of the vote over Roosevelt (democract).

BASICS II Outcome of the election: Roosevelt

won with 62.5% of the votes (523 of the 531 electoral votes!!)

What happened?

BASICS PROBLEM II Hormone-replacement therapy for

women with symptoms of menopause. Does it work?

Possible problem. Solution. Why did the result with

observational data was wrong?

BASICS PROBLEM II Sample selection problem. Training courses for employees. Annual physical: medical review.

SOLUTION if possible Randomized experiment. Example. In medical science only randomized

experiments are accepted. Tobacco litigation. Food and Drug administration. Many times experiments are NOT

AVAILABLE AND ARE VERY EXPENSIVE. Look for other designs: “clever”

regression and proper estimation procedures.

EXOGENEITY Basic problem: to find an exogenous

source of variation. Impossible (Lucas’ Critique): everything

in economics is set simultaneously->DGEM and computable models. “Deep” parameters

Construct experiments or look for natural and pseudo-experiments. Find credible sources of exog. variation.

IMPORTANT!! Statistical methods are never wrong! It is their application by clumsy, un-

experienced or careless researchers that could result in wrong answers.

Remember: if you get the design /assumptions /data right the results will always be right.

Design versus techniques: design, design design

The NYT litigation Last year Morgan Stanley agreed to pay

$54 millions for a sexual discrimination demand. Recently, Walmart.

In the 70’s some women journalist at the NYT claimed that they were discriminated.

Is a simple difference between the salary of men and women a good indicator of discrimination?

Judge decision.

Regressions

)35,9(78,96)1( 0 iii uwomanwage

)51,8(14,77)2( 20 iiii ueducwomanwage

)05,11(86,13)3( 32320 iiiiiii uincenpromoprizeseducwomanwage

Let’s talk about justice Is it fair to pay people in a just

society vastly different amounts? John Paulson made 3,700 millions

dollars last year (yes, it is not wrong). Five hedge managers made more than 1,000 millions dollars.

Maybe black swan luck (Taleb)

Let’s talk about justice Gates, Tiger Woods, etc. Should those inequalities be

permitted? (CEO get more than 4000 times the salary of the lowest paid)

What principles should be chose to decide on the answer?

Let’s talk about justice Merit based on effort (work ethics) Even with the same effort depend a lot in

social fortunate circumstances: imagine that the return to effort depends on birth order (being the first child has advantages). Then, why should income, opportunities and wealth be based on this arbitrary event (from a moral point of view)? (you do not choose to be the first child)

Let’s talk about justice How can you show that empirically?

Explaining the relationship between birth order and intelligence, Science, 22 june 2007.

Two theories: Gestational Social interaction within the family

Let’s talk about justice How do we test those theories? Is

social rank in the family or birth order as such what matters?

Let’s talk about genes How much can genes explain of your

height? Weight? life length?

Let’s talk about discrimination Are African-American discriminated

in the US job market?