Book Reviews, Economics

Mastering ‘Metrics: The Path From Cause To Effect

Mastering ‘Metrics: The Path From Cause To Effect by Mark S. Rzepczynski, The Finance Professionals’ Post

The authors provide an easy-to-read overview of key concepts in econometrics for anyone desiring a strong intuitive description of how to conduct analysis using simple techniques. Covering a limited number of topics with practical examples of each, they offer a useful framework for conducting fundamental econometric analysis. Although the book does not directly discuss financial issues, it provides a good foundational review for the financial empiricist who wishes to better structure econometric tests.

Statistics is second only to accounting among the technical skills necessary for engaging in modern finance and is fundamental for anyone who considers quantitative work a core element of finance. Unfortunately, practitioners’ actual statistical and econometric knowledge and intuition may be more limited than their level of academic exposure would suggest. No one willingly reads a book on econometrics to close this knowledge gap, so technical skills atrophy rather than advance with money management experience.

Mastering ‘Metrics: The Path from Cause to Effect is a short book that helps bridge the gap between classroom recipes and reality. A breezy presentation of very general topics, it is nevertheless packed with good, commonsense advice on how to perform econometric analysis. Readers who seek core insights into finance will be disappointed, but what the book lacks in financial specifics, it makes up for with clear thinking. It is a readable compilation of the accumulated fundamental wisdom of two econometric experts.

Written by leading labor econometricians Joshua D. Angrist and Jörn-Steffen Pischke, Mastering ’Metrics helps readers avoid the use of brute-force computing power to analyze data. Rather, it focuses on how to develop the intuition to finesse data and formulate the right test. It demonstrates how econometric techniques can be used to arrive at the critical point of “other things being equal” despite such key obstacles as selection and omitted-variables bias.

Angrist and Pischke use case examples to focus on five core econometric topics: random assignments, regression, instrumental variables, regression discontinuity, and differences in differences. These cases include factors in the success of charter schools, drivers of SAT scores, and bank failures during the Great Depression. Albeit generally unrelated to finance, these are all fascinating topics for anyone interested in critical policy issues. The cases show the power of using the right technique to find answers that are not always obvious.

The first section provides a foundation for thinking about any statistical test and getting the sample right. One of the limitations of finance is that randomized trials cannot be used to answer key questions; nevertheless, focusing on how to conduct randomized trials and formulate tests is critical to doing good econometric work. This section helps the reader better appreciate the critical process of properly formulating tests before commencing analysis.

The authors discuss regression unconventionally by showing how to get to the point where the key economic phrase ceteris paribus (other things being equal) can be applied. The purpose of regression is not merely to fit a line but, rather, to examine a number of independent variables that can explain or control the behavior of the dependent variable and arrive at an understanding of the core relationships. Regression modeling cannot actually make all things equal, but using the right conditional variables can identify clearly the key influences on a sample.

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Mastering ‘Metrics – Description

Mastering ‘Metrics: The Path from Cause to Effect by Joshua D. Angrist

Applied econometrics, known to aficionados as ‘metrics, is the original data science. ‘Metrics encompasses the statistical methods economists use to untangle cause and effect in human affairs. Through accessible discussion and with a dose of kung fu-themed humor, Mastering ‘Metrics: The Path from Cause to Effect presents the essential tools of econometric research and demonstrates why econometrics is exciting and useful.

The five most valuable econometric methods, or what the authors call the Furious Five–random assignment, regression, instrumental variables, regression discontinuity designs, and differences in differences–are illustrated through well-crafted real-world examples (vetted for awesomeness by Kung Fu Panda’s Jade Palace). Does health insurance make you healthier? Randomized experiments provide answers. Are expensive private colleges and selective public high schools better than more pedestrian institutions? Regression analysis and a regression discontinuity design reveal the surprising truth. When private banks teeter, and depositors take their money and run, should central banks step in to save them? Differences-in-differences analysis of a Depression-era banking crisis offers a response. Could arresting O. J. Simpson have saved his ex-wife’s life? Instrumental variables methods instruct law enforcement authorities in how best to respond to domestic abuse.

Wielding econometric tools with skill and confidence, Mastering ‘Metrics: The Path from Cause to Effect uses data and statistics to illuminate the path from cause to effect.

  • Shows why econometrics is important
  • Explains econometric research through humorous and accessible discussion
  • Outlines empirical methods central to modern econometric practice
  • Works through interesting and relevant real-world examples

Mastering ‘Metrics – Review

From the Back Cover

“Written by true ‘masters of ‘metrics,’ this book is perfect for those who wish to study this important subject. Using real-world examples and only elementary statistics, Angrist and Pischke convey the central methods of causal inference with clarity and wit.”–Hal Varian, chief economist at Google

“With humor and rigor, this book explores key approaches in applied econometrics. The authors present accessible, interesting examples–using data-heavy figures and graphic-style comics–to teach practitioners the intuition and statistical understanding they need to become masters of ‘metrics. A must-read for anyone using data to investigate questions of causality!”–Melissa S. Kearney, University of Maryland and the Brookings Institution

“This valuable book connects the dots between mathematical formulas, statistical methods, and real-world policy analysis. Reading it is like overhearing a conversation between two grumpy old men who happen to be economists–and I mean this in the best way possible.”–Andrew Gelman, Columbia University

“Modern econometrics is more than just a set of statistical tools–causal inference in the social sciences requires a careful, inquisitive mindset. Mastering ‘Metrics: The Path from Cause to Effectis an engaging, fun, and highly accessible guide to the paradigm of causal inference.”–David Deming, Harvard University

“Few fields of statistical inquiry have seen faster progress over the last several decades than causal inference. With an engaging, insightful style, Angrist and Pischke catch readers up on five powerful methods in this area. If you seek to make causal inferences, or understand those made by others, you will want to read this book as soon as possible.”–Gary King, Harvard University

“Posing several well-chosen empirical questions in social science, Mastering ‘Metrics: The Path from Cause to Effect develops methods to provide the answers and applies them to interesting datasets. This book will motivate beginning students to understand econometrics, with an appreciation of its strengths and limits.”–Gary Chamberlain, Harvard University

Mastering 'Metrics

Mastering ‘Metrics: The Path from Cause to Effect by Joshua D. Angrist