Friday, September 23

Omitted variable bias

Mahalanobis does a splendid job describing an obstacle faced by applied economists: the importance of controlling for all relevant independent effects. This is called the omitted variables problem and when not resolved properly it can result in biased coefficient estimates.

The crowning achievement of his discussion is a simple one: it is the ability to graphically demonstrate (ie, to visualize) the problem in a two dimensional diagram. Link

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