\newcommand{\indep}{\mbox{$\perp\!\!\!\perp$}} {r global-options, include=FALSE, purl=FALSE} knitr::opts_chunkset(fig.width=7, fig.height=4, fig.path='figs/', fig.align='center')  What is selection on observables? Technically it is $$\{Y_{0i}, Y_{1i}\} \indep D_i | X_i = x$$ This means that for some value ofX_i$, which we denote as$x$, we have a randomized experiment. Let's look at this via a simulted example. Let's pretend that we can see all of the potential outcomes: {r} ## Create data and some "invisible variable" x n <- 100 x <- runif(n, 0, 10) ## Create the potential outcomes y1 <- rnorm(n, mean = 10, sd = 1) y0 <- rnorm(n, mean = x, sd = 1) ## Plot the potential outcomes plot(x, y1, col = "red", xlab = "", xlim = c(0, 10), ylim = c(min(y0) - 1, max(c(y0, y1)) + 1)) points(x, y0) ## What is the ATE? Not an estimate, the actual ATE ate <- mean(y1 - y0) ate ## Can we get the ATT?  ## Random experiment {r} ## Treatment vector d <- rbinom(n, 1, 0.5) ## Plot the "observed" values plot(x, y1, col = "red", xlab = "", xlim = c(0, 10), ylim = c(min(y0) - 1, max(c(y0, y1)) + 1)) points(x, y0) points(x[d==1], y1[d==1], pch = 19, col = "red") points(x[d==0], y0[d==0], pch = 19) ## Get our observed Y y <- ifelse(d, y1, y0) ## What is the difference in means estimator? dim <- mean(y[d==1]) - mean(y[d==0]) c("ATE" = ate, "DIM" = dim)  Not bad, but what if we violate the randomization, and instead say that people with higher values of some invisible index are more likely to receive treatment? {r} ## Higher probability of treatment for x > 5 prTreat <- ifelse(x > 5, 0.8, 0.3) plot(x, prTreat) d <- rbinom(n, 1, pr = prTreat) ## Plot the potential outcomes plot(x, y1, col = "red", xlab = "", xlim = c(0, 10), ylim = c(min(y0) - 1, max(c(y0, y1)) + 1)) points(x, y0) ## Plot the "observed" values points(x[d==1], y1[d==1], pch = 19, col = "red") points(x[d==0], y0[d==0], pch = 19) abline(v = 5, lty = 2, col = "blue") ## Get our observed Y y <- ifelse(d, y1, y0) ## What is the difference in means estimator? dim <- mean(y[d==1]) - mean(y[d==0]) c("ATE" = ate, "DIM" = dim)  It is biased upwards! Because we are more likely to see the values of$y_{0i}$when they are lower, it looks like the treatment effect is too large. ## Selection on Observables Let's say the index$x$is now observed. We know that treatment is as if random when$x > 5$and when$x \leq 5$. Then we know that $$\{Y_{0i}, Y_{1i}\} \indep D_i | X_i = x$$ is true; of course in reality you wouldn't know the true data generating process, but you would have to guess and defend it. Now, we can use the estimators Chad talked about in the SOO section. For now, let's use the subclassification estimator, $$\sum_{j=1}^M \{\overline{Y_{1j}} -\overline{Y_{0j}}\} \frac{n_j}{n}$$ where$\overline{Y_{dj}}$is the average outcome for observations in group$j$with treatment status$d$, and$n_j$is the number of observations in group$j$. {r} dim_subclass <- (mean(y[d==1 & x > 5]) - mean(y[d==0 & x > 5])) * (sum(x > 5) / n) + (mean(y[d==1 & x <= 5]) - mean(y[d==0 & x <= 5])) * (sum(x <= 5) / n) c("ATE" = ate, "DIM Subclass" = dim_subclass)  Pretty good! So conditioning on$X$allows us to recover the ATE because selection on observables holds here. Let's see that explicitly. Note, we can only do this because we are simulating an example where we see all potential outcomes. Unconditionally, is there a relationship between the potential outcomes and the treatment? {r} cor(y0, d) cor(y1, d)  It looks like y0 is not independent of$d$. What about if we look at conditional independence? {r} cor(y0[x > 5], d[x > 5]) cor(y0[x <= 5], d[x <= 5])  Of course, we know they are uncorrelated because the probability of treatment is constant in those subgroups. What if our probability of treatment directly corresponded to our$x$variable? For example: {r} ## Higher probability of treatment as x increases prTreat <- 1 / (1 + exp(-(-2.5 + x/2))) plot(x, prTreat) d <- rbinom(n, 1, pr = prTreat) ## Plot the potential outcomes plot(x, y1, col = "red", xlim = c(0, 10), ylim = c(min(y0) - 1, max(c(y0, y1)) + 1)) points(x, y0) ## Plot the "observed" values points(x[d==1], y1[d==1], pch = 19, col = "red") points(x[d==0], y0[d==0], pch = 19) ## Get our observed Y y <- ifelse(d, y1, y0) ## What is the difference in means estimator? dim <- mean(y[d==1]) - mean(y[d==0]) c("ATE" = ate, "DIM" = dim)  Also biased upwards. Here is a case where we could use inverse propensity score weighting. But instead of using the true probability of treatment, we have to estimate it. {r} ## Logit to estimate treatment model (will be correct model in this case) treatModel <- glm(d ~ x, family = binomial) ## Did it recover the true treatment assignemnt model? cbind(treatModel$coefficients, c(-2.5, 0.5)) estPrTreat <- predict(treatModel, type = "response")  Now we can see how well our model for estimating the propensity scores did: {r} plot(estPrTreat, prTreat)  It looks like we fit the model pretty well! Now let's do our weighting: {r} prD <- mean(d) IPW <- (d * prD + (1 - d) * (1 - prD)) / (d * estPrTreat + (1 - d) * (1 - estPrTreat)) plot(density(IPW))  There are some extreme examples, which might not be desirable. Nonetheless, let's use weighting and compute our difference in means estimator: {r} lmAte <- lm(y ~ d, weight = IPW) dim_ipw <- lmAte$coefficients c("ATE" = ate, "DIM IPW Weight" = dim_ipw)  Much better! ## Non-constant Probability of Treatment Now, is it the fact that there was a non-constant probability of treatment that was a problem or was it the fact that there was non-constant probabilit of treatment that was related to the potential outcomes? This is a subtle point. Let's look at the following example: {r} ## Create data and some "invisible variable" x n <- 100 x <- runif(n, 0, 10) ## Create the potential outcomes y1 <- rnorm(n, mean = 10, sd = 1) y0 <- rnorm(n, mean = 2, sd = 1) ## Plot the potential outcomes plot(x, y1, col = "red", xlab = "", xlim = c(0, 10), ylim = c(min(y0 - 1), max(y1 + 1))) points(x, y0) ## What is the ATE? Not an estimate, the actual ATE ate <- mean(y1 - y0) ate  Now let's again have non-constant treatment: {r} ## Higher probability of treatment for x > 5 prTreat <- ifelse(x > 5, 0.8, 0.2) plot(x, prTreat) d <- rbinom(n, 1, pr = prTreat) ## Plot the potential outcomes plot(x, y1, col = "red", xlab = "", xlim = c(0, 10), ylim = c(min(y0) - 1, max(y1) + 1)) points(x, y0) ## Plot the "observed" values points(x[d==1], y1[d==1], pch = 19, col = "red") points(x[d==0], y0[d==0], pch = 19) abline(v = 5, lty = 2, col = "blue") ## Get our observed Y y <- ifelse(d, y1, y0) ## What is the difference in means estimator? dim <- mean(y[d==1]) - mean(y[d==0]) c("ATE" = ate, "DIM" = dim)  All good! Again, even though there is non-constant probability of treatment, that does not correlate with our potential outcomes. If it did, and we observed$x\$, we could use SOO to estimate our ATE.