Numerical Computing

• We want to use python as a tool to compute economic models
• As python is open-source, many libraries exist for this
  • numpy: Workhorse library for vectorized computing
  • pandas: Data cleaning and manipulation
  • scipy: Statistical computing methods

Learning Objectives

• Understand how to use basic commands in numpy
• Grasp why vectorization is valuable and how to use it
• Leverage these tools to solve problems in Economics

Why do I care?

• You know how to use lists in python
  • What are vectors if not lists?
  • What are matrices if not lists of lists?
• Why bother using a package when we can do whatever is in the package ourselves?

You should care!

• numpy provides many advantages
  • Fast: interfaces with C/C++, which makes it much faster than doing things yourself
  • Standard: you can trust numpy to do an operation properly, and more importantly, in a way that’s numerically stable
  • Broadcasting: numpy gives us the ndarray, which makes matrix and array operations much easier
• Documentation

Basic Problem¹

• Suppose I want to generate a list of the numbers from 0 to 999,999 and then multiply each value of the list by 2
• We can do this with our existing tools

Basic Problem (Lists)

raw_range = range(1000000)
raw_list = list(raw_range)
%timeit raw_list_x_2 = [x*2 for x in raw_list]

53.6 ms ± 1.33 ms per loop (mean ± std. dev. of 7 runs, 10 loops each)

new_list = []
%timeit for x in raw_list: new_list.append(x*2)

83.1 ms ± 2.3 ms per loop (mean ± std. dev. of 7 runs, 10 loops each)

Basic Problem (numpy)

import numpy as np

raw_array = np.arange(1000000)
%timeit raw_array_x_2 = 2 * raw_array

634 µs ± 20.6 µs per loop (mean ± std. dev. of 7 runs, 1000 loops each)

Inner Product

Recall that for two \(n\times 1\) vectors \(x_1\) and \(x_2\), we can compute the inner product as

\[x_1^{\top}x_2 = \sum_{i=1}^nx_{1i}x_{2i}\]

Inner Product Function (Lists)

def inner_product_slow(x_1: list, x_2: list) -> float:
    """
    Compute the inner product of two lists
    """

    inner_prod = 0
    for i in range(len(x_1)):
        inner_prod += x_1[i] * x_2[i]
    return inner_prod

x_1 = list(range(100))
x_2 = list(range(100, 200))
%timeit inner_product_slow(x_1,x_2)

10.1 µs ± 250 ns per loop (mean ± std. dev. of 7 runs, 100000 loops each)

np.inner

x_1_arr = np.arange(100)
x_2_arr = np.arange(100,200)
%timeit np.inner(x_1_arr, x_2_arr)

1.13 µs ± 24 ns per loop (mean ± std. dev. of 7 runs, 1000000 loops each)

np.inner(x_1_arr,x_2_arr) == inner_product_slow(x_1,x_2)

True

Exercise: Factorial

Can you rewrite our factorial function using numpy? Is it faster? Hint: look up np.prod.

Solutions: Factorial

%timeit np.prod(np.arange(1,11))

3.43 µs ± 30.3 ns per loop (mean ± std. dev. of 7 runs, 100000 loops each)

%%time

out = 1
for i in range(1,11):
    out *= i

CPU times: user 10 µs, sys: 1 µs, total: 11 µs
Wall time: 13.1 µs

Matrix Multiplication in numpy

A = np.arange(10).reshape((5,2))
B = np.arange(10, 20).reshape((2,5))

print(f'Matrix A:\n {A}')
print(f'Matrix B:\n {B}')
print(f'Product:\n {A @ B}')

Matrix A:
 [[0 1]
 [2 3]
 [4 5]
 [6 7]
 [8 9]]
Matrix B:
 [[10 11 12 13 14]
 [15 16 17 18 19]]
Product:
 [[ 15  16  17  18  19]
 [ 65  70  75  80  85]
 [115 124 133 142 151]
 [165 178 191 204 217]
 [215 232 249 266 283]]

Reshaping using -1 Argument

We can always leave one dimension as -1 to tell numpy to just make that dimension whatever is necessary to complete the array. For example, if we wanted an array of dimension \(5 \times 2 \times 1\), we could do

len_three_arr = len_one_arr.reshape((-1,2,1))
len_three_arr.shape

(5, 2, 1)

len_one_arr.reshape((3,-1))

ValueError: cannot reshape array of size 10 into shape (3,newaxis)

Arithmetic in numpy

Multiplication of a scalar to an array works as expected:

5. * my_arr

array([[ 0.,  5., 10., 15., 20.],
       [25., 30., 35., 40., 45.],
       [50., 55., 60., 65., 70.],
       [75., 80., 85., 90., 95.]])

1. / my_arr

array([[       inf, 1.        , 0.5       , 0.33333333, 0.25      ],
       [0.2       , 0.16666667, 0.14285714, 0.125     , 0.11111111],
       [0.1       , 0.09090909, 0.08333333, 0.07692308, 0.07142857],
       [0.06666667, 0.0625    , 0.05882353, 0.05555556, 0.05263158]])

Array Operations

What about multiplying an array by an array?

my_arr * my_arr

array([[  0,   1,   4,   9,  16],
       [ 25,  36,  49,  64,  81],
       [100, 121, 144, 169, 196],
       [225, 256, 289, 324, 361]])

my_arr > 10.

array([[False, False, False, False, False],
       [False, False, False, False, False],
       [False,  True,  True,  True,  True],
       [ True,  True,  True,  True,  True]])

Exercise: Absolute Value

Compute the absolute value of an arbitrary array (do not use any built-in absolute value functions).

Solutions: Absolute Value

def my_abs(arr: np.array) -> np.array:
    """Compute absolute value of an array"""

    neg_elements = arr < 0
    arr[neg_elements] = arr[neg_elements] * -1
    return arr

my_abs(np.arange(-3,3))

array([3, 2, 1, 0, 1, 2])

np.arange(-3,3) * np.sign(np.arange(-3,3))

array([3, 2, 1, 0, 1, 2])

Vectorized Math

numpy has built-in vectorized mathematical functions (called universal functions, or ufuncs):

np.exp(my_arr)

array([[1.00000000e+00, 2.71828183e+00, 7.38905610e+00, 2.00855369e+01,
        5.45981500e+01],
       [1.48413159e+02, 4.03428793e+02, 1.09663316e+03, 2.98095799e+03,
        8.10308393e+03],
       [2.20264658e+04, 5.98741417e+04, 1.62754791e+05, 4.42413392e+05,
        1.20260428e+06],
       [3.26901737e+06, 8.88611052e+06, 2.41549528e+07, 6.56599691e+07,
        1.78482301e+08]])

np.sqrt(my_arr)

array([[0.        , 1.        , 1.41421356, 1.73205081, 2.        ],
       [2.23606798, 2.44948974, 2.64575131, 2.82842712, 3.        ],
       [3.16227766, 3.31662479, 3.46410162, 3.60555128, 3.74165739],
       [3.87298335, 4.        , 4.12310563, 4.24264069, 4.35889894]])

Aggregating Functions

my_arr

array([[ 0,  1,  2,  3,  4],
       [ 5,  6,  7,  8,  9],
       [10, 11, 12, 13, 14],
       [15, 16, 17, 18, 19]])

np.sum(my_arr)

190

np.sum(my_arr, axis = 0)

array([30, 34, 38, 42, 46])

np.sum(my_arr, axis = 1)

array([10, 35, 60, 85])

Why Is This Useful?

• These are element-wise operations (we do the function once for each element of an array)
• In python, we’d have to use a for loop (slow!)
• numpy has a faster language (C/C++/Fortran) run these loops
• Implication: if you can run a calculation as a vectorized numpy operation using these functions, it will be much faster than a loop.

Binary Universal Functions

Sometimes we have ufuncs that accept two arguments:

a = new_arr[:,0]
b = new_arr[:,1]
print(a,b)

[4 0 6 6 6] [1 6 2 9 7]

np.maximum(a,b)

array([4, 6, 6, 9, 7])

np.max(new_arr, axis = 1)

array([4, 6, 6, 9, 7])

What is Broadcasting?

• Suppose we have an array and a vector with a dimension in common:

vec = np.arange(5).reshape((-1,5))
mat = np.ones(15).reshape((-1,5))
print(f'vec shape: {vec.shape}, mat shape: {mat.shape}')

vec shape: (1, 5), mat shape: (3, 5)

(mat / vec).shape

(3, 5)

(vec / mat).shape

(3, 5)

Broadcasted Results

Let’s look at these arrays to try to diagnose what’s happening:

print(vec)
print(mat)
print(mat / vec)

[[0 1 2 3 4]]
[[1. 1. 1. 1. 1.]
 [1. 1. 1. 1. 1.]
 [1. 1. 1. 1. 1.]]
[[       inf 1.         0.5        0.33333333 0.25      ]
 [       inf 1.         0.5        0.33333333 0.25      ]
 [       inf 1.         0.5        0.33333333 0.25      ]]

print(vec / mat)

[[0. 1. 2. 3. 4.]
 [0. 1. 2. 3. 4.]
 [0. 1. 2. 3. 4.]]

Broadcasting Errors

numpy will only broadcast if

1. Arrays have the same number of dimensions, and
2. All but one of the dimensions match.

So this operation fails because the number of dimensions do not match:

mat / np.ones(3)

ValueError: operands could not be broadcast together with shapes (3,5) (3,) 

Broadcasting Errors

And this operation fails because the arrays differ across multiple dimensions:

np.ones((5,2,1)) / np.ones((4,1,1))

ValueError: operands could not be broadcast together with shapes (5,2,1) (4,1,1) 

Example: Covariance Matrix

Broadcasting makes calculating the variance/covariance matrix of vector of random variables easy

draws = np.random.multivariate_normal(
    mean = np.arange(6,9),
    cov = np.diag(np.arange(1,4)),
    size = 1000
)
demeaned_draws = draws - np.mean(draws, axis = 0)
demeaned_draws.T @ demeaned_draws / 1000

array([[ 0.9774961 ,  0.00404101, -0.0754416 ],
       [ 0.00404101,  1.85719771,  0.07401078],
       [-0.0754416 ,  0.07401078,  2.89976322]])

Exercise: Standardizing Features

We now know enough numpy to efficiently “standardize” elements of a matrix (or more accurately, to rewrite sklearn.preprocessing.StandardScaler):

\[ z_{ij} = \frac{x_{ij}-\mu_j}{\sigma_j} \]

This is useful if your features have different scales for certain models (i.e. LASSO). Please write a function standardize to do this (that is, calculate the mean and standard deviation of each column, and return the array with standardized values).

Solutions: Standardizing Features

def standardize(arr: np.array) -> np.array: 
    """
    Standardize the features in `arr`
    """

    mu_j = np.mean(arr, axis = 0)
    sigma_j = np.std(arr, axis = 0)

    return (arr - mu_j) / sigma_j

standardize(new_arr)

array([[-0.17149859, -1.31876095],
       [-1.88648444,  0.32969024],
       [ 0.68599434, -0.98907071],
       [ 0.68599434,  1.31876095],
       [ 0.68599434,  0.65938047]])

Random Draws

numpy allows for easy simulation draws. For example, we can draw 100,000 times from a standard normal distribution:

draws = np.random.standard_normal(100000)
print(np.mean(draws), np.std(draws))

0.0029345100785475027 0.9966634341413745

Seeds

• For reproducibility, it’s good practice to set seeds so that you can regenerate results for random processes
• In numpy:

rng = np.random.default_rng(seed=481) # rng = random number generator
rng_draws = rng.standard_normal(100000)
print(np.mean(rng_draws), np.std(rng_draws))

-0.0016440274114192328 1.00077298022399

Exercise: Random?

We’re skeptical that numpy is actually giving us random numbers, so we want to test it by doing the following procedure 1000 times:

1. Simulate 1000 standard normal random variables.
2. Take the mean of those 1000 simulations.

Armed with our 1000 sample means, we’re going to calculate the mean and standard deviation of the sample means. What should they be? Do we get close? Please set a seed for reproducibility.

Solutions: Random?

Via the Central Limit Theorem, we know that the sample mean \(\overline{x}\) of \(n\) i.i.d. random variables with mean \(\mu\) is distributed

\[ \overline{x} \sim \mathcal{N}\left(\mu, \frac{\sigma^2}{n}\right) \]

%%time
rng = np.random.default_rng(seed=481)

sample_means = []
for i in range(1000):
    sample_means.append(np.mean(rng.standard_normal(size=1000)))

print(np.mean(sample_means), np.std(sample_means))

-2.977436149096266e-05 0.031892612678989775
CPU times: user 23.9 ms, sys: 691 µs, total: 24.5 ms
Wall time: 25.3 ms

Solutions: Random? (Faster)

%%time
rng = np.random.default_rng(seed=481)

random_draws = rng.standard_normal(size=1000*1000).reshape((1000,1000))
sample_means = np.mean(random_draws, axis = 0)

print(np.mean(sample_means), np.std(sample_means))

-2.9774361490963187e-05 0.030131789839109725
CPU times: user 13.7 ms, sys: 298 µs, total: 14 ms
Wall time: 14.1 ms

print(0, np.sqrt(1./1000))

0 0.03162277660168379

Linear Regression

Given feature (explanatory variables) matrix \(\textbf{X}\) and outcome variable \(y\), define residuals from the model for a choice of coefficient vector \(\beta\) as

\[ \underbrace{e}_{n\times 1} = \underbrace{y}_{n\times 1} - \underbrace{\textbf{X}}_{n\times k}\underbrace{\beta}_{k\times 1} \]

Then the coefficients from an OLS (ordinary least squares) regression are the solution to the problem

\[ \min_{\beta}\; e^{\top}e \]

OLS Solution

If \(\mathbf{X}^{\top}\mathbf{X}\) is invertible, then the solution to the problem has a closed-form solution given by

\[ \hat{\beta} = (\underbrace{\mathbf{X}^{\top}\mathbf{X}}_{k\times k})^{-1}\underbrace{\mathbf{X}^{\top}}_{k\times n}\underbrace{y}_{n\times 1} \]

Loading Data

First, we need to load the data¹

X = np.array(
    [
        [2,1200,3.2,0],
        [1,1400,3.8,1],
        [19,900,2.5,0],
        [10,1400,3.8,1],
        [5,1000,3.0,0],
        [4,1100,3.9,0]
    ]
)
y = np.array([60000, 90000, 30000, 200000, 150000, 30000]).reshape(-1,1)

print(X.shape, y.shape)

(6, 4) (6, 1)

Calculating Estimator

beta_hat = np.linalg.inv(X.T @ X) @ X.T @ y
beta_hat

array([[   720.48960622],
       [   114.35428578],
       [-18598.07654699],
       [ 51613.9979523 ]])

Adding Intercept

X_int = np.concatenate(
    [
        np.ones(X.shape[0]).reshape(-1,1),
        X,
    ],
    axis = 1
)
X_int

array([[1.0e+00, 2.0e+00, 1.2e+03, 3.2e+00, 0.0e+00],
       [1.0e+00, 1.0e+00, 1.4e+03, 3.8e+00, 1.0e+00],
       [1.0e+00, 1.9e+01, 9.0e+02, 2.5e+00, 0.0e+00],
       [1.0e+00, 1.0e+01, 1.4e+03, 3.8e+00, 1.0e+00],
       [1.0e+00, 5.0e+00, 1.0e+03, 3.0e+00, 0.0e+00],
       [1.0e+00, 4.0e+00, 1.1e+03, 3.9e+00, 0.0e+00]])

axis

We do need the axis argument to put the intercept vector in the right place:

np.concatenate(
    [
        np.ones(X.shape[0]).reshape(-1,1),
        X,
    ]
)

ValueError: all the input array dimensions for the concatenation axis must match exactly, but along dimension 1, the array at index 0 has size 1 and the array at index 1 has size 4

np.r_ and np.c_

If you know that you’re adding rows or columns to a matrix, numpy has two handy functions to do just that:

np.c_[np.ones(X.shape[0]).reshape(-1,1), X]

array([[1.0e+00, 2.0e+00, 1.2e+03, 3.2e+00, 0.0e+00],
       [1.0e+00, 1.0e+00, 1.4e+03, 3.8e+00, 1.0e+00],
       [1.0e+00, 1.9e+01, 9.0e+02, 2.5e+00, 0.0e+00],
       [1.0e+00, 1.0e+01, 1.4e+03, 3.8e+00, 1.0e+00],
       [1.0e+00, 5.0e+00, 1.0e+03, 3.0e+00, 0.0e+00],
       [1.0e+00, 4.0e+00, 1.1e+03, 3.9e+00, 0.0e+00]])

np.hstack and np.vstack

Alternatively, we can perform the operation with np.hstack:

np.hstack((np.ones(X.shape[0]).reshape(-1,1), X))

array([[1.0e+00, 2.0e+00, 1.2e+03, 3.2e+00, 0.0e+00],
       [1.0e+00, 1.0e+00, 1.4e+03, 3.8e+00, 1.0e+00],
       [1.0e+00, 1.9e+01, 9.0e+02, 2.5e+00, 0.0e+00],
       [1.0e+00, 1.0e+01, 1.4e+03, 3.8e+00, 1.0e+00],
       [1.0e+00, 5.0e+00, 1.0e+03, 3.0e+00, 0.0e+00],
       [1.0e+00, 4.0e+00, 1.1e+03, 3.9e+00, 0.0e+00]])

Regress With Intercept

beta_hat_int = np.linalg.inv(X_int.T @ X_int) @ X_int.T @ y
beta_hat_int

array([[ 1.75082781e+05],
       [-1.22516556e+03],
       [-1.49834437e+01],
       [-2.62417219e+04],
       [ 9.73509934e+04]])

from sklearn.linear_model import LinearRegression
reg_model = LinearRegression(fit_intercept=False).fit(X_int, y)
reg_model.coef_

array([[ 1.75082781e+05, -1.22516556e+03, -1.49834437e+01,
        -2.62417219e+04,  9.73509934e+04]])

np.allclose(beta_hat_int.flatten(), reg_model.coef_)

True

Likelihood Example

• Assume that we observe \(n\) observations (\(x_1,...,x_n\))
• Each observation is the number of heads we flipped out of \(k\) coin flips
  • More generally called number of successes from \(k\) trials

Maximum Likelihood Estimation

Given a likelihood function, we can define MLE estimator for our example as the value of \(p\) that maximizes the probability of observing our data. Formally, it is the solution to the problem

\[ \max_{\hat{p}}\; \mathcal{L}_n(x_1,...x_n|\hat{p}) \]

Analytical Solution

p_mle = (1./n) * np.sum(x_i/k)
p_mle

0.349745

Log-Likelihood Function

def neg_ll(theta: float, data: np.array, k: int) -> float:
    """
    Compute the negative (why?) log-likelihood for a 
    binomial distribution given data and a specific parameter (theta). 
    The factorial term is omitted (why?)
    """

    p_successes = data * np.log(theta)
    p_failures = (k-data) * np.log(1-theta)

    return -np.sum(p_successes + p_failures)

print(f'Log-Likelihood when we\'re far away: {-neg_ll(.8, x_i, k)}')
print(f'Log-Likelihood when we\'re close: {-neg_ll(.3, x_i, k)}')

Log-Likelihood when we're far away: -1124588.3911042244
Log-Likelihood when we're close: -653013.134119855

Maximization

import scipy as sp

sp.optimize.minimize(
    fun=neg_ll, # the objective function
    x0=.25, # starting guess
    args=(x_i, k), # additional parameters passed to neg_ll
    bounds = ((0,1),), # bounds for the optimization
    method = 'Nelder-Mead' # optionally pick an algorithm
)

 final_simplex: (array([[0.34974365],
       [0.34974976]]), array([647288.64111237, 647288.6411581 ]))
           fun: 647288.6411123656
       message: 'Optimization terminated successfully.'
          nfev: 32
           nit: 16
        status: 0
       success: True
             x: array([0.34974365])

Why Nelder-Mead?

What happens if we let scipy use its default solver (BFGS, I believe)?

sp.optimize.minimize(
    fun=neg_ll, # the objective function
    x0=.25, # starting guess
    args=(x_i, k), # additional parameters passed to neg_ll
    bounds = ((0,1),) # bounds for the optimization
)

      fun: 671916.227352009
 hess_inv: <1x1 LbfgsInvHessProduct with dtype=float64>
      jac: array([-531973.30590399])
  message: b'CONVERGENCE: REL_REDUCTION_OF_F_<=_FACTR*EPSMCH'
     nfev: 6
      nit: 1
     njev: 3
   status: 0
  success: True
        x: array([0.25])

Bayes Rule

Recall Bayes Rule:

\[ \mathbb{P}(A|B) = \frac{\mathbb{P}(A \cap B)}{\mathbb{P}(B)} = \frac{\mathbb{P}(B|A)\mathbb{P}(A)}{\mathbb{P}(B)} \]

Sampling From Posterior

• Suppose we want to sample from the posterior distribution
  • Hard to do without a functional form for the posterior
• Easier question: for two parameters \(\theta_1\) and \(\theta_2\), what should their relative frequency be in my sample?
  • Equivalently: if \(\theta_2\) has twice the posterior probability mass/density as \(\theta_1\), how many draws of \(\theta_2\) should I have in my sample relative to \(\theta_1\)?

Monte Carlo Simulation

Suppose I have two “candidate” draws for my sample from the posterior, \(\theta_1\) and \(\theta_2\). By Bayes Rule, I know the ratio of their posterior probabilities can be calculated as

\[ \frac{\mathbb{P}(\theta_1|x_1,...,x_n)}{\mathbb{P}(\theta_2|x_1,...,x_n)} = \frac{\mathbb{P}(x_1,...,x_n|\theta_1)\mathbb{P}(\theta_1)}{\mathbb{P}(x_1,...,x_n|\theta_2)\mathbb{P}(\theta_2)} \equiv \alpha \]

where \(\alpha\) is the “acceptance rate”. Then to pick which parameter to include in our sample, just need to simulate a random variable that will pick \(\theta_1\) with probability \(\min\{\alpha, 1\}\) and \(\theta_2\) otherwise.

Intuition

\[ \frac{\mathbb{P}(\theta_1|x_1,...,x_n)}{\mathbb{P}(\theta_2|x_1,...,x_n)} \equiv \alpha \]

• What will we choose when \(\mathbb{P}(\theta_1|x_1,...,x_n) > \mathbb{P}(\theta_2|x_1,...,x_n)\)?
• What will we choose when \(\mathbb{P}(\theta_2|x_1,...,x_n) > \mathbb{P}(\theta_1|x_1,...,x_n)\)?

Exercise: Markov Chain

Generate 1000 draws from a Markov Chain that starts at zero with your choice of noise term. Set a seed for reproducibility.

Solutions: Markov Chain (Slower)

%%time
rng = np.random.default_rng(seed = 481)

chain = []
x = 0

for i in range(1000):
    x += rng.standard_normal()
    chain.append(x)

CPU times: user 638 µs, sys: 108 µs, total: 746 µs
Wall time: 734 µs

Exercise: Markov Chain (Faster)

%%time
rng = np.random.default_rng(seed = 481)

chain = np.cumsum(rng.standard_normal(size = 1000))

CPU times: user 155 µs, sys: 3 µs, total: 158 µs
Wall time: 161 µs

Markov Chain Visualized

plt.plot(chain)

Metropolis-Hastings Implementation

def met_hast(n_iterations: int) -> list:
    """
    Run Metropolis-Hastings algorithm for our binomial example.
    """
    post_draws = []
    theta_old = .5
    for i in range(n_iterations):
        theta_new = theta_old + np.random.normal(loc = 0, scale = .05)
        ll_old = -neg_ll(theta_old, x_i, k)
        ll_new = -neg_ll(theta_new, x_i, k)
        acceptance_rate = np.exp(ll_new-ll_old)
        if np.random.uniform() < acceptance_rate:
            post_draws.append(theta_new)
            theta_old = theta_new
        else:
            post_draws.append(theta_old)
    
    return post_draws

Metropolis-Hastings Trace Plot

simulation_draws = met_hast(10000)
print(f'Mean of posterior draws: {round(np.mean(simulation_draws),4)}')
plt.plot(range(10000), simulation_draws)

Mean of posterior draws: 0.3498

Metropolis-Hastings Trace Plot (Remove Burn-In)

print(f'Mean of posterior draws: {round(np.mean(simulation_draws[1000:]),4)}')
plt.plot(range(1000,10000), simulation_draws[1000:])

Mean of posterior draws: 0.3497

Metropolis-Hastings Draws

plt.hist(simulation_draws[1000:])
plt.show()