161 Omitted variable bias algebra

This video explains econometrics by deriving the omitted variable bias formula. We start with a true model and a mis-specified model that omits a relevant variable, then use OLS formulas and covariance properties to understand how the estimated coefficient is contaminated by the relationship between the included and omitted variables. The derivation reveals that the bias depends on the true effect of the omitted variable and its correlation with the included variable, forming the core of the omitted variable bias formula. We will explore how to determine the direction of this bias in future videos. Visit AxiomTutoring.com and subscribe to @AxiomTutoringCourses.