Explain instrumental variables with an example
Last updated: August 30, 2025
Quick Overview
Explain instrumental variables in simple terms and provide a concrete example.
Compass
August 30, 202533
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2,959 solved
Explain instrumental variables in simple terms and provide a concrete example.
Statistics questions at Compass test your ability to reason quantitatively and design rigorous experiments. This Onsite question evaluates your understanding of statistical inference and its application to business decisions.
What the Interviewer Expects
- Set up the problem formally with proper notation
- Apply the correct statistical test with clear justification
- Interpret results with appropriate caveats and confidence levels
- Discuss practical significance vs statistical significance
- Identify potential confounders and how to address them
Key Topics to Cover
How to Approach This
- Define your hypotheses (H0 and H1) clearly before performing any test.
- Calculate required sample size BEFORE running an experiment, using power analysis.
- Remember the Central Limit Theorem: sample means become approximately normal with large n.
- Watch for Simpson's paradox. Always segment data by key dimensions.
- Distinguish between statistical significance and practical significance.
Possible Follow-up Questions
- What alternative statistical method could you use here?
- How would you explain this result to a non-technical audience?
- What if the sample size is very small?
- What assumptions does this test make, and how would you validate them?
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Setting Up the Problem
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Solution Approach
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