INTRODUCTION ECONOMETRICS I

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INTRODUCTIONECONOMETRICS I
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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

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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)

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Assumptions, assumptions

• Big suprime problem pricing of derivates on
  mortgages. Assumption/hypothesis?
• Standard theory in physics Assumption/hypothesis?

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BASICS I
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BASIC PROBLEM I

• Endogeneity
• Circularity
• Egg and chicken
• Causality and correlation two very different
  concepts!!

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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

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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).

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BASICS II

• Outcome of the election Roosevelt won with 62.5
  of the votes (523 of the 531 electoral votes!!)
• What happened?

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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?

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BASICS PROBLEM II

• Sample selection problem.
• Training courses for employees.
• Annual physical medical review.

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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.

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EXOGENEITY

• Basic problem to find an exogenous source of
  variation.
• Impossible (Lucas Critique) everything in
  economics is set simultaneously-gtDGEM and
  computable models. Deep parameters
• Construct experiments or look for natural and
  pseudo-experiments. Find credible sources of
  exog. variation.

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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

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The NYT litigation

• Last year Morgan Stanley agreed to pay 54
  millions for a sexual discrimination demand.
  Recently, Walmart.
• In the 70s 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.

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Regressions
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Lets 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)

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Lets 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?

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Lets 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)

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Lets 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

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Lets talk about justice

• How do we test those theories? Is social rank in
  the family or birth order as such what matters?

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Lets talk about genes

• How much can genes explain of your height?
  Weight? life length?

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Lets talk about discrimination

• Are African-American discriminated in the US job
  market?