Causality in Econometrics (3)

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1 Graphical Causal Models References Causality in Econometrics (3) Alessio Moneta Max Planck Institute of Economics Jena 26 April 2011 GSBC Lecture Friedrich-Schiller-Universität Jena Causality in Econometrics 1/27

2 Graphical Causal Models Terminology and Representation of Statistical Dependence Causality in Econometrics 2/27

3 Sources and Motivations The graphical-models approach to causal inference was mainly developed by: Spirtes, Glymour, Scheines (2000), Causation, Prediction, and Search, 2 nd edition. Pearl (2000), Causality: Models, Reasoning, and Inference. Forerunners: J.S. Mill C. Spearman T. Haavelmo, H. Wold, H. Simon H. Reichenbach, P. Suppes Causality in Econometrics 3/27

4 Sources and Motivations Ideas: Use of probability + diagrams to represent associations in the data Use of graph-theory to represent and analyze causal relations This permits, in particular: addressing the symmetry problem, typical of probabilistic approaches representation of structures where interventions are possible Formalization of the relationship between probabilistic and causal representation Emphasis on inference, agnosticism about causal ontology. But: many points of contact with probabilistic approach (Reichenbach) manipulability theory (Woodward). Causality in Econometrics 4/27

5 Formal preliminaries Graph: < V, M, E > set V of vertices (or nodes) to represent variables. set M of marks as >, (or EM empty mark), o, to represent directions of causal influences. set E of edges, which are pairs of the form {[V 1, M 1 ], [V 2, M 2 ]}, to represent causal relationships. V 1 V2 V 3 G: < {V 1, V 2, V 3 }, {EM, >}, {{[V 1, EM], [V 2, >]}, {[V 1, EM], [V 3, EM]}, {[V 3, EM], [V 2, >]}} > Causality in Econometrics 5/27

6 Formal preliminaries Undirected graph: graph in which the set of marks M = {EM} Directed graph: graph in which the set of marks M = {EM, >} and for each edge in E the marks are are always: EM, > Directed edges: A B ( {[A, EM], [B, >]}) A : parent, B : child (descendant). Causality in Econometrics 6/27

7 Formal preliminaries Path: undirected path: a sequence of vertices A,..., B such that for every pair of vertices X, Y adjacent (in the sequence) there is a connecting edge {[X, M 1 ][Y, M 2 ]}. directed path: a sequence of vertices A,..., B such that for every pair of vertices X, Y adjacent (in the sequence) there is a connecting edge {[X, EM][Y, >]}. acyclic path: path that contains no vertex more than once, otherwise it is cyclic. Causality in Econometrics 7/27

8 Example Graphical Causal Models References Introduction (In)dependence Probabilistic Inference V 1 V2 V4 V5 V 3 Directed paths: < V 1, V 2, V 4, V 5 >; < V 3, V 2, V 4, V 5 >; < V 2, V 4, V 5 >, etc. Undirected paths: < V 1, V 3, V 2, V 4, V 5 >; < V 1, V 2, V 3 >, etc. Undirected cyclic path: < V 1, V 2, V 3, V 1 > No directed cyclic paths. Causality in Econometrics 8/27

9 More terminology Collider: vertex V such that A V B Unshielded collider: vertex V such that A V B and A and B are not adjacent ( connected by edge) in the graph Complete graph: graph in which every pair of vertices are adjacent Directed Acyclic Graph (DAG): directed graph that contains no directed cyclic paths Directed Cyclic Graph (DCG): directed graph that contains directed cyclic paths Causality in Econometrics 9/27

10 Graphs and probabilistic dependence First use of graphs: representation of probabilistic dependence and independence Nodes: random variables (discrete or continuous). Edges: probabilistic dependence. Bayesian networks (Pearl 1985). Causality in Econometrics 10/27

11 Conditional Independence If X, Y, Z are random variables, we say that X is conditionally independent of Y given Z, and write X Y Z (1) if for discrete variables: P(X = x, Y = y Z = z) = P(X = x Z = z)p(y = y Z = z) for continuous variables: f XY Z (x, y z) = f X Z (x z)f Y Z (y z) We can also write (simplifying the notation): X Y Z f (x, y, z)f (z) = f (x, z)f (y, z) Causality in Econometrics 11/27

12 Conditional independence Some equalities: X Y Z f (x, y z) = f (x z)f (y z) X Y Z f (x, y, z)f (z) = f (x, z)f (y, z) X Y Z f (x y, z) = f (x z) X Y Z f (x, z y) = f (x z)f (z y) X Y Z f (x, y, z) = f (x z)f (y, z) Note: f (x, y z) = f (x, y, z)/f (z) Causality in Econometrics 12/27

13 Conditional independence It holds also: X Y Z Y X Z (symmetry) If Z is empty (trivial) X Y: X is independent of Y. Other properties: X YW Z = X Y Z (decomposition) X YW Z = X Y ZW (weak union) See Pearl 2000:11 Causality in Econometrics 13/27

14 Interpretations of C.I. Useful interpretations of C.I. X Y Z: once we know Z, learning the value of Y does not provide additional information about X. once we know Z, reading X is irrelevant for reading Y. once we observe realizations of Z, observing realizations of Y is irrelevant for predicting the frequent realizations of X. Causality in Econometrics 14/27

15 Independence and uncorrelatedness Important to distinguish between (conditional) independence and (conditional or partial) correlation. Recall: Variance of X: σ 2 X := E[(X E(X))2 ] Covariance between X and Y: σ XY := E[(X E(X))(Y E(Y))] Correlation coefficient (Pearson): ρ XY := σ XY σ X σ Y Linear regression coefficient: r XY := σ XY σ 2 Y = ρ XY σ X σ Y This suggest that correlation is a measure of linear dependence Notice: σ XY = σ YX and ρ XY = ρ YX but r XY = r YX Causality in Econometrics 15/27

16 Independence and uncorrelatedness Recall: Partial correlation between X and Y given Z ρ XY.Z = ρ XY ρ YZ ρ XZ 1 ρ 2 YZ 1 ρ 2 XZ Conditional independence X Y Z: f XY Z (x, y z) = f X Z (x z)f Y Z (y z) It holds: X Y = ρ XY = 0 X Y Z = ρ XY.Z = 0 and (of course): ρ XY = 0 = X / Y ρ XY.Z = 0 = X / Y Z Causality in Econometrics 16/27

17 Independence and uncorrelatedness In general: ρ XY = 0 = X Y ρ XY.Z = 0 = X Y Z However, if the joint distribution F(XYZ) is normal: ρ XY = 0 = X Y ρ XY.Z = 0 = X Y Z Causality in Econometrics 17/27

18 Population and sample Notice also the difference between population parameters and sample statistics: ρ XY = σ XY σ X σ Y ˆρ XY = n k=1 (X k X)(Y k Ȳ) n k=1 (X k X) 2 n k=1 (Y k Ȳ) 2 r YX = σ XY σ 2 X ˆr YX = n k=1 (X k X)(Y k Ȳ) n k=1 (X k X) 2 ˆβ OLS = (X X) 1 XY, for vectors of data X (X 1,..., X n ), Y (Y 1,..., Y n ) and where X = n 1 ΣX i. Notice that when X = 0 and Ȳ = 0, ˆr YX = ˆβ OLS. Causality in Econometrics 18/27

19 Other concepts related to independence If, given the r.v. X and Y, the moments E(X k ) < and E(Y m ) <, it turns out that X Y iff E(X k Y m ) = E(X k )E(Y m ), for all k, m = 1, 2,... X and Y are (k, m)-order dependent iff E(X k Y m ) = E(X k )E(Y m ), for any k, m = 1, 2,... (1-1)-order linear dependence: E(XY) = E(X)E(Y) (1-1)-order independence: E(XY) = E(X)E(Y) E{[X E(X)][Y E(Y)]} = 0 σ XY = 0 ρ XY = 0 Orthogonality E(XY) = 0 Note: 1 if X and Y are uncorrelated (ρ XY = 0), this is equivalent to say that their mean deviations are orthogonal (if X and Y are centered, subtracting their mean, they become orthogonal). 2 if X and Y are orthogonal, ρ XY = 0 only if E(X) = 0 or E(Y) = 0 Causality in Econometrics 19/27

20 Other concepts related to independence r-th order independence E(Y r X = x) = 0 for all x R X In summary: independence = 1 st -order independence = non-correlation orthogonality mean-subtracted variables non-correlation = dependencies!) independence (there could be non-liner (cfr. Spanos 1999: ) Causality in Econometrics 20/27

21 Statistical model Importance of defining a statistical model. Typical statistical model for continuous set of n random variables X Probability model: defines a family of density functions f (x; θ) defined over the range of values of X; Sampling model: X ((T n) matrix of data) is a random sample. (cfr. Spanos 1999: 33) Causality in Econometrics 21/27

22 The Markov Condition The Markov condition permits the representation of probabilistic dependence through a DAG. In particular, it imposes a relationship between the Bayesian network (DAG in which nodes are random variables) and the probabilistic structure. A directed acyclic graph G over V (set of vertices) and a probability distribution P(V) satisfy the Markov condition iff for every W V, W V\(Descendants(W) Parents(W)) given Parents(W). (Spirtes et al. 2000: 11) or, in other words: Any vertex (node) is conditionally independent of its nondescendants (except parents), given its parents. Causality in Econometrics 22/27

23 Markov Condition (example) V 1 V2 V4 V5 V 3 The DAG above and the probability distribution P(V 1, V 2, V 3, V 4 ) satisfy MC iff: (1) V 4 {V 1, V 3 } V 2 (2) V 5 {V 1, V 2, V 3 } V 4 Notice that many other c.i. relations follow from (1) and (2) by applying symmetry, decomposition, and weak union (see Slide 13 ). For example {V 1, V 3 } V 4 V 2 ; V 1 V 4 V 2 ; V 3 V 4 V 2 ; V 1, V 4 {V 2, V 3 }; etc. {V 1, V 2, V 3 } V 5 V 4 ; V 5 {V 1, V 2 } V 4 ; etc. Causality in Econometrics 23/27

24 Markov condition (factorization) The M.C. permits the following factorization: discrete case: P(V 1,..., V n ) = Π n i=1 P(V i Parents(V i )),where if Parents(V i ) =, P(V i Parents(V i )) = P(V i ) continuous case: f (V 1,..., V n ) = Π n i=1 f (V i Parents(V i )), where if Parents(V i ) =, f (V i Parents(V i )) = f (V i ) V 1 V2 V4 V5 V 3 We have: P(V 1, V 2, V 3, V 4, V 5 ) = P(V 1 V 3 )P(V 2 V 1, V 3 )P(V 3 )P(V 4 V 2 )P(V 5 V 4 ) Recall chain rule: in general P(V 1,..., V n ) = P(V n V n 1,..., V 2, V 1 ),..., P(V 2 V 1 )P(V 1 ) Causality in Econometrics 24/27

25 The d-separation criterion d-separation: a graphical criterion which captures exactly all the C.I. relationships that are implied by the M.C. Consider a graph G, with distinct nodes X, Y and a set of nodes W, where neither X nor Y belongs to W. We say that X and Y are d-separated given W in G iff there exists no undirected path U between X and Y, such that: 1 every collider C ( C ) on U is in W or has a descendant in W, and 2 no other vertex on U is in W. if there is such a path, then X and Y are d-connected. (cfr. Spirtes et al. 2000: 14). Included those derived by the MC through symmetry, decomposition and weak union. Causality in Econometrics 25/27

26 The d-separation criterion (Pearl s definition) d-separation: Consider a graph G, with distinct nodes X, Y and a set of nodes W, where neither X nor Y belongs to W. A path U is said to be d-separated by a set of nodes W iff 1 U contains a chain ( C or C ) or a fork ( C ) such that the middle node C W, or 2 U contains a collider C ( C ) s.t. C / W and s.t. no descendant of C is in W. A set W is said to d-separate X from Y iff W every path from X to Y is d-separated by W. Otherwise X and Y d-connected by W. (cfr. Pearl 2000: 16-17). Causality in Econometrics 26/27

27 Graphical Causal Models References Reading List Spirtes, Glymour, Scheines (2000), Causation, Prediction, and Search, MIT Press 2 nd edition: Chapter 1 and 2 Pearl (2000), Causality: Models, Reasoning, and Inference, CUP: Section 1.1 and 1.2 Spanos, A. (1999), Probability Theory and Statistical Inference. CUP: Further reading: Section 2.2 and 6.4 Cooper, G.F. (1999), An Overview of the Representation and Discovery of Causal Relationships Using Bayesian Networks, in C. Glymour, G.F. Cooper, Computation Causation, and Discovery, MIT Press. Scheines, R. (1997), An Introduction to causal inference. www Causality in Econometrics 27/27