Lesson 4
What is the error term?
Big question
Why do econometric models include a term for what we did not measure?
Lesson progress
Complete checkpoints as you learn
Learning objectives
- Explain what is the error term? in plain language.
- Use error term correctly in an interpretation.
- Connect the lesson idea to a formula, graph, Python result, or real example.
Simple explanation
The error term collects other influences on the dependent variable that are not included directly in the model. It reminds us that economic outcomes are affected by more than one measured variable.
Key terms
- Error term
- The part of the outcome not explained by the included variables.
- Omitted factor
- A relevant influence that is not directly included in the model.
- Unobserved
- Not measured in the dataset.
- Residual
- The observed gap between actual and fitted values after estimation.
Error term
Example
In a wage model, motivation, local labor market conditions, or job type may affect wages but may not be fully measured.
Checkpoint activity
Pause and explain this lesson's main idea in your own words before moving forward.
Try it yourself
Write one plain-English sentence explaining the main idea from this lesson.
Common mistakes
Check these before you move on.
A regression coefficient describes a pattern unless the assumptions or research design support a causal interpretation.
Quick quiz
What does the error term represent?
Key takeaway
The error term is not a mistake; it is how a simple model admits the world is more complex.