[00:00:00.

270] - Speaker 3
Kido Invens was born in 1963 in the Netherlands. He received his PhD in 1991 from Brown University,
Providence, USA. He is the Applied Econometrics Professor and Professor of Economics at Stanford
University, USA. So please, welcome. Guido. I want to.

[00:00:23.130] - Speaker 1
Thank the committee for the prize and in particular for highlighting the importance of credible causal
inference. The estimation of causal effects, comparisons of outcomes under different treatments or
policies from observational non randomized data is important for providing advice to policymakers. In
the last three decades, there's been an explosion of work in this area in economics as well as many
other disciplines. And I see the prize as a recognition for all of this work. I grew up in a small town in
the Netherlands, but in high school I was faced with the decision what major to choose for College.
My economics teacher lent me a book by the 1969 Nobel laureate and Dutch Econometrician, Jan
Timbergen, which appealed to me with its mixture of mathematics and practical relevance. I was
particularly impressed with Timbergen's ability to combine high level academic work with involvement
in policy advice. And I decided to enroll in the Econometrics program in Rotterdam that Timbergen
had founded in the 1960s. After a detour through an exchange program at the University of Hull, I did
my PhD at Brown University in the US. Since then, I've moved around from Coast to Coast before
settling in 2012 at Stanford University in California.

[00:01:36.110] - Speaker 1
During my undergraduate and graduate days, I was not exposed to much work that explicitly focused
on causality. Although there had been case studies going back as far as the 1860s, including the
SNOW study on the causes of cholera, and Econometrics has implicitly always focused on causality,
the explicit use of the term causality was rare through the 1980s and early 90s. It only started
increasing sharply after 1995, with currently over 50 % of working papers in the National Bureau of
Economic Research Working Paper Series using the term, as the figure on the right, based on the
work by Curry, Cleven, and Zewie, has shows. Looking back at my own work from that time, Josh and I
did not use the term causal in our 1994 paper on the local average treatment effect, but two years
later used it over 100 times in our 1996 paper with Donald Rubin. Nowadays, causal inference is a fast
growing, vibrant, and interdisciplinary field with research in statistics, political science, economics,
computer science, epidemiology, and other areas working on common problems coming from
different perspectives with different tools and interacting closely in conferences and seminars. During
the pandemic, I started, together with other researchers in this area, an online inter university seminar
on causal inference that weekly attracts hundreds of attendees.

[00:02:56.040] - Speaker 1
In the last year, Society for Causal Inference has been founded to further bring together this
community. To put the themes of this talk in context, let me start by being clear about what I mean by
some key terms. The way I want to think about causality, and this is heavily influenced by the work of
Donald Rubin, is in terms of effects of manipulations or interventions. A unit, say an individual or a
firm or a country, can be exposed to some policy or intervention at a particular point in time. For
example, an individual can take or not take some medication, or a country can enact or not enact a
lockdown or mass mandate to combat COVID 19. We can see what the unit did, take the medication
or not, enact a lockdown or not, and we can see the outcome given at action. What we're interested in
is the comparison of the actual outcome with the counter factual outcome had the alternative action
been taken. The comparison of the actual outcome and the counter factual is the causal effect. We
cannot ever measure such a causal effect directly because we cannot see the counter factual
outcome.

[00:04:02.740] - Speaker 1
A randomized experiment solves a big part of the problem. I take a population of units and randomly
assign some to the intervention or treatment and the others to the alternative, the control treatment.
The randomisation ensures balance, at least an expectation, ensuring we can estimate at least the
average causal effect under weak assumptions. In economics and other social sciences, experiments
are often not feasible and we have to make do with observational studies where assignment to the
treatment or control group is partly the result of deliberate choices rather than purely chance. As a
result, there may be confounders that is variables that differ between the treatment and control
groups and that may be correlated with the outcomes directly. Their presence makes it more
challenging to credibly infer causal facts and observational data, especially if some of the
confounders are not observed. With natural experiments, we try to get back to the credibility of
randomized experiments without formal randomisation. I cannot say it better than my 10 year old
daughter said it to a Stanford media team on the morning of October 11th. Doing experiments without
really doing experiments. In practice, it turns out that there are many cases where idiosyncrasies in
the assignment process create such natural experiments that allow for credible causal inference.

[00:05:22.340] - Speaker 1
Policy decision and regulations often involve arbitrary cutoffs, and small changes in one's
environment may lead to substantial changes in actions as behavioral economists have shown in
many settings.

[00:05:35.630] - Speaker 2
Let me start with a very brief history of causality in economics and statistics as far as it relates to our
work on natural experiments and instrumental variables. In the 19th century, there were some
interesting case studies. In particular, one could make a case for viewing John Snow as the patron
saint of natural experiments for a study demonstrating the role contaminated water played in the
spread of cholera. In the 1920s and '30s, Fisher and Neiman developed statistical methods for
designing and analyzing randomized experiments. This work was hugely influential, in particular in
biomedical settings. Randomized experiments are still widely viewed as the gold standard in causal
inference. Eventually, in 1962, US Congress mandated the use of randomized experiments for
assessing the efficacy of new drugs. Currently, experiments are also widely used in online settings by
the tech companies and by development economists, including the 2019 Nobel laureates Banerjee,
Dufflow, and Kramer. Whereas statisticians emphasize the chance aspect of the assignment
mechanism in randomized experiments, Econometricians during the 1920s to 40s focused on
problems where choice by economic agents played a primary role. Tim Berger studied the demand
and supply for goods in agricultural markets using data and quantities, prices and other variables.

[00:06:57.080] - Speaker 2
Prices are obviously not set randomly in such markets, and Tim Berger used instrumental variables
ideas to estimate the demand and supply functions. Sears Wright and Tim Bergen also used graphs
to illustrate their models in an approach that in the 1990s and 2000s was rejuvenated and formalized
by Julia Pearl and co authors. Haverhill studied the relation between consumption and income. He
described the consumption function as a theoretical concept defined in terms of controlled
experiments of the type Neiman and Fisher considered. Like Tim Bergen in a different setting,
Haverhill is very careful in articulating the difficulties in estimating the consumption function that
arrives from income being determined by the same forces that determine consumption rather than
being randomly assigned. In the late 1960s and 70s, statisticians ventured beyond the randomized
experiments in their studies of causal effects. In particular, Don Rubin extended the naming setup for
randomized experiments to observational studies using a potential outcome set up in combination
with an emphasis on manipulation to define causal effects. Around the same time, extending the line
of work by Tim Bergen and Havermo, Econometricians associated with the Col's Commission built
increasingly complex models, diverging from the experimental approach in statistics.

[00:08:21.470] - Speaker 2
Over time, statisticians became increasingly suspicious of the simultaneous equations models used
in the Econometrics. Phil David, for example, wrote, I despair of ever understanding the logic of
simultaneous equations well enough to tackle them.

[00:08:35.300] - Speaker 1
The increasingly technical nature of this work also led to growing skepticism among some
Econometricians and the concern of a widening gulf between theoretical economic tricians and
researchers doing empirical work. In a paper with the title Let's Take the Con out of Econometrics, Ad
Limo bemoaned that the credibility of empirical work was at a low. He wrote that, This is a sad and
decidedly unscientific state of affairs we find ourselves in. Hardly anyone takes data analysis
seriously, or perhaps more accurately, hardly anyone takes anyone else's data analysis seriously. To
improve the credibility of empirical work, at least to be clear about its limitations, Leemur suggested
making sensitivity analysis a more routine part of empirical work. Much interesting work has been
done in this direction, including recent work by Andrews, Genskou, and Shapiro, and it continues to be
a very active area with additional impetus from the work on partial identification initiated by Mansky.
It has so far not become as routine a part of empirical work as Leemur might have hoped or as it
should be. David Henry also questioned the credentials of Econometrics in a paper with the title
Econometrics, Alchemy, or Science. His conclusion is more optimistic than Leman's, though, arguing
that the ease with which spurious results could be created suggested Alchemy, but the scientific
state.