Econometrics

One way to think about Econometrics is that it is the closest economists can usually get to doing experiments in the same way experiments are done in medicine and other fields involving people. The idealized experiment is one where people are randomly assigned to either the treatment or control group such that the participants and the researchers don’t know which group each person is in.

By randomly assigning a large sample of participants to two different groups, we can be fairly confident that on average the two groups are identical in their attributes, apart from the treatment that only one group receives. By having a double-blind experiment, we can be confident that the participants and researchers aren’t conciously or subconciously (placebo effect) affecting the results of the treatment group. Because of this setup, we can look at the difference in outcomes of the two groups and be fairly confident that any differences are due to the treatment and nothing else.

But it’s usually impossible or unethical to perform an ideal experiment in economics. Imagine trying to examine the effect of years of schooling on future earnings. Can you force people into a treatment group with more years of schooling and a control group with less? Is it sufficient to just collect a sample of people and compare the earnings of people with high schooling to those with low schooling?

How can we answer the above question and others like it? Econometrics. Econometrics is a vast field and today we will just focus on the basics of something called regression.