Omitted Variables bias, comprehensive example and definitions
In: 1
you want to measure effect of college degree on wage.
you get data on wages, and having a college degree (from like 2000, before all the unemployed art majors)
you find pretty strong correlation, and substantially higher wage for college graduates vs. high school graduates.
But: a person who has a college degree is the one who can get into college in the first place. So must have had a few things going for them, and they might have done fairly well in life even without a college degree.
“Things going for them” is an omitted variable.
The extra wage they would have gotten for it is the bias.
The way to fight this bias is try to measure the omitted factor. e.g. through Parent’s income, or Parent’s education.
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