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Explain Orthogonalization and Cross-Fitting in Double ML
A subscription company wants the effect of a price discount on
12-month retention. Discounts in the last year were not randomized:
account managers gave them mainly to customers with high usage and
high contract value. The data scientist proposes LinearDML in
EconML with gradient boosting as nuisance models and 5-fold
cross-fitting. The head of analytics asks you to justify every part.
- Explain, with the Frisch-Waugh-Lovell (FWL) idea, what is being residualized and what the final regression looks like.
- What does "orthogonal" buy you, concretely, when the nuisance models are flexible and imperfect?
- Describe cross-fitting step by step and state the problem it prevents. What would you tell someone who says "it is just a data-splitting ritual"?
- What assumptions does DML not remove, and which checks would you run before trusting the estimate? Would you use DML if the discount were randomized?
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