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Introductory Econometrics

S2 2016

Your friendly teaching team

Monash Econometrics and Business Statistics

Semester 2, 2016
Welcome

I This is the first unit in econometrics and a pre-requisite for


most third year units in econometrics, business analytics and
actuarial studies
I You are certainly in the right place to learn econometrics
What is Econometrics?

I Lets see what wikipedia says


What is Econometrics?

I Lets see what wikipedia says


I Metrics as a suffix means measuring things and analysing
those measurements. Econo tells us that we are talking
about measuring and analysing economic things.
I Other examples of quantitative analytics in other fields are
biometrics and psychometrics
I Remember that this was coined in 1930, when many of the
business and commerce disciplines of today were at their
infancy or did not exist, so the context was Econo not
Busino (which sounds really bad)
I Econometric methods are used in economics, finance,
marketing and management
I Econometrics uses mathematical and statistical methods
I It uses Descriptive Analytics, Predictive Analytics and
Prescriptive Analytics to describe and understand quantitative
information and provide evidence based policy decisions in
business and economics
Logistics

I Refer to the Unit Guide and the Moodle site


Overall Goal
Evidence based (aka empirical) analysis of business and economic
problems quotes . This comprises the following stages:
1. Understanding the problem
2. Formulating an appropriate conceptual model to tackle the
problem
3. Collecting appropriate data
4. Looking at data (Descriptive Analytics)
5. Estimating the model, making inference, predictions and
policy prescriptions as appropriate (Predictive and Prescriptive
Analytics)
6. Evaluating, learning and improving each of the previous steps,
and iterating until the problem is solved
This unit mainly concentrates on 5, but also contributes to all
stages from 2 to 6.
This units contribution

We study regression modelling in this unit, which is a powerful


tool for empirical analysis. We learn how to estimate regression
models, how to interpret them, and how to make inference,
predict and prescribe policy advice on the basis of these models.
Predictive versus prescriptive analytics

I Understanding the distinction between predictive and


prescriptive analytics is important
I In predictive analytics we use some variables to predict a
target variable without any requirement of causality (similar
to your doctor using symptoms to predict your illness)
I In prescriptive analytics we want to measure the causal
relationship between variables, to prescribe how to achieve a
desired change in the target variable by manipulating the
cause (similar to your doctor prescribing antibiotics to cure
your chest infection)
I We can always use multiple regression for predictive analytics
I We can sometimes use multiple regression to tease out causal
relationships
Example 1

General health and cognitive ability is heavily influenced at very


early stages of development, even before a person is born. The
problem is to determine if there is a causal link between cigarette
smoking of mothers during pregnancy and birth weight of children,
in order to design an effective pre-natal education campaign.
I Understanding the problem and formulating a model cig-model
Example 1

General health and cognitive ability is heavily influenced at very


early stages of development, even before a person is born. The
problem is to determine if there is a causal link between cigarette
smoking of mothers during pregnancy and birth weight of children,
in order to design an effective pre-natal education campaign.
I Understanding the problem and formulating a model cig-model

I Collecting data and looking at the data go to eviews


Example 1

General health and cognitive ability is heavily influenced at very


early stages of development, even before a person is born. The
problem is to determine if there is a causal link between cigarette
smoking of mothers during pregnancy and birth weight of children,
in order to design an effective pre-natal education campaign.
I Understanding the problem and formulating a model cig-model

I Collecting data and looking at the data go to eviews

I Estimating the model and making inference about the


parameter that embodies the effect of smoking on birth
weight, controlling for other relevant factors
Example 1

General health and cognitive ability is heavily influenced at very


early stages of development, even before a person is born. The
problem is to determine if there is a causal link between cigarette
smoking of mothers during pregnancy and birth weight of children,
in order to design an effective pre-natal education campaign.
I Understanding the problem and formulating a model cig-model

I Collecting data and looking at the data go to eviews

I Estimating the model and making inference about the


parameter that embodies the effect of smoking on birth
weight, controlling for other relevant factors
Example 2

Measuring body fat percentage is expensive and not possible


everywhere. Can we predict body fat based on other characteristics
that can be measured easily by a scale and a tape measure?
I Understanding the problem and formulating a model fat-model
Example 2

Measuring body fat percentage is expensive and not possible


everywhere. Can we predict body fat based on other characteristics
that can be measured easily by a scale and a tape measure?
I Understanding the problem and formulating a model fat-model

I Collecting data and looking at the data go to eview


Example 2

Measuring body fat percentage is expensive and not possible


everywhere. Can we predict body fat based on other characteristics
that can be measured easily by a scale and a tape measure?
I Understanding the problem and formulating a model fat-model

I Collecting data and looking at the data go to eview

I Finding the best predictive model


Example 2

Measuring body fat percentage is expensive and not possible


everywhere. Can we predict body fat based on other characteristics
that can be measured easily by a scale and a tape measure?
I Understanding the problem and formulating a model fat-model

I Collecting data and looking at the data go to eview

I Finding the best predictive model


Quotes by Jim Barksdale

Jim Barksdale was the CEO of Netscape, and is now the


co-chairman of Spread Networks. He is known for his managerial
skills.
You cannot manage that which you cannot measure.

If we have data, lets look at data. If all we have are


opinions, lets go with mine.
Back to overview
Effect of smoking on birth weight 1

I Do we need a predictive model or a prescriptive model?


I Can we collect experimental data?
I Given non-experimental nature of data, what do we need to
do to make sure that cigarette smoking is not acting as a
proxy for some other real cause?
Effect of smoking on birth weight 1

I Do we need a predictive model or a prescriptive model?


I Can we collect experimental data?
I Given non-experimental nature of data, what do we need to
do to make sure that cigarette smoking is not acting as a
proxy for some other real cause?
I We need to make sure that all other relevant factors that can
conceptually influence the birth weight of a child are
controlled for:

bwght = f (cigs, motheduc, familyinc, fatheduc, alcohol, vitamins, . . .

Back to example1
Measuring body fat

I This is definitely a problem of


Measuring body fat

I This is definitely a problem of prediction


Measuring body fat

I This is definitely a problem of prediction


I Want to find factors that are highly correlated with body fat
percentage without any presumption of causality
I The problem becomes finding the best subset of predictors
from a list of potentially useful set

fat = f (weight )
fat = f (weight, abdomen )

I All of the above are valid predictive models. Find the one that
is best for prediction.
Back to example2

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