Concept

Omitted-variable bias

Summary
In statistics, omitted-variable bias (OVB) occurs when a statistical model leaves out one or more relevant variables. The bias results in the model attributing the effect of the missing variables to those that were included. More specifically, OVB is the bias that appears in the estimates of parameters in a regression analysis, when the assumed specification is incorrect in that it omits an independent variable that is a determinant of the dependent variable and correlated with one or more of the included independent variables. In linear regression Intuition Suppose the true cause-and-effect relationship is given by: :y=a+bx+cz+u with parameters a, b, c, dependent variable y, independent variables x and z, and error term u. We wish to know the effect of x itself upon y (that is, we wish to obtain an estimate of b). Two conditions must hold true for omitted-variable bias to exist in linear regression:
  • the omitted variable must be a determinan
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