Question

How do you understand endogeneity? Where do we need to know about it in our everyday life?

Answer 1

Endogeneity is a situation in which a predictor variable is correlated with the error term.

Let us say you are an ice cream vendor and you have collected the data of your past 5 years sales and the selling price of ice cream. Then, you go to a data scientist and tell them to do linear regression and find the profit function. You forgot that you used to increase the prices when the temperature is high for getting maximum profit. Here, we have the problem of endogeneity since the error term is not constant and will give us the inaccurate profit function.