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  • October–December 2022
  • Article
  • INFORMS Journal on Data Science

Achieving Reliable Causal Inference with Data-Mined Variables: A Random Forest Approach to the Measurement Error Problem

By: Mochen Yang, Edward McFowland III, Gordon Burtch and Gediminas Adomavicius
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  • | Pages:18
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Abstract

Combining machine learning with econometric analysis is becoming increasingly prevalent in both research and practice. A common empirical strategy involves the application of predictive modeling techniques to "mine" variables of interest from available data, followed by the inclusion of those variables into an econometric framework, with the objective of estimating causal effects. Recent work highlights that, because the predictions from machine learning models are inevitably imperfect, econometric analyses based on the predicted variables are likely to suffer from bias due to measurement error. We propose a novel approach to mitigate these biases, leveraging the ensemble learning technique known as the random forest. We propose employing random forest not just for prediction, but also for generating instrumental variables to address the measurement error embedded in the prediction. The random forest algorithm performs best when comprised of a set of trees that are individually accurate in their predictions, yet which also make "different" mistakes, i.e., have weakly correlated prediction errors. A key observation is that these properties are closely related to the relevance and exclusion requirements of valid instrumental variables. We design a data-driven procedure to select tuples of individual trees from a random forest, in which one tree serves as the endogenous covariate and the other trees serve as its instruments. Simulation experiments demonstrate the efficacy of the proposed approach in mitigating estimation biases, and its superior performance over an alternative method (simulation-extrapolation), which has been suggested by prior work as a reasonable method of addressing the measurement error problem.

Keywords

Machine Learning; Econometric Analysis; Instrumental Variable; Random Forest; Causal Inference; AI and Machine Learning; Forecasting and Prediction

Citation

Yang, Mochen, Edward McFowland III, Gordon Burtch, and Gediminas Adomavicius. "Achieving Reliable Causal Inference with Data-Mined Variables: A Random Forest Approach to the Measurement Error Problem." INFORMS Journal on Data Science 1, no. 2 (October–December 2022): 138–155.
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About The Author

Edward McFowland III

Technology and Operations Management
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    Pattern Detection in the Activation Space for Identifying Synthesized Content

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    By: Edward McFowland III, Sandeep Gangarapu, Ravi Bapna and Tianshu Sun
More from the Authors
  • Nonparametric Subset Scanning for Detection of Heteroscedasticity By: Charles R. Doss and Edward McFowland III
  • Pattern Detection in the Activation Space for Identifying Synthesized Content By: Celia Cintas, Skyler Speakman, Girmaw Abebe Tadesse, Victor Akinwande, Edward McFowland III and Komminist Weldemariam
  • A Prescriptive Analytics Framework for Optimal Policy Deployment Using Heterogeneous Treatment Effects By: Edward McFowland III, Sandeep Gangarapu, Ravi Bapna and Tianshu Sun
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