Regression Discontinuity Design (RDD)

THE MENTAL MODEL: Regression Discontinuity Design (RDD) is a clever way to find a cause-and-effect relationship when you can't run a true A/B test. It works by finding an arbitrary cutoff point and assuming the people just below it are nearly identical to the people just above it. The only real difference is that one group got a "treatment" and the other didn't. Any sharp jump in outcomes right at that cutoff is likely caused by the treatment itself.

HOW IT WORKS: You need two things: a continuous variable (like an exam score, age, or income) and a sharp cutoff for an intervention. For example, everyone with a score of 80 or above gets into a program. You then plot an outcome variable (like future salary) against the score. If you see a sudden jump, or "discontinuity," in the salary trend line right at the score of 80, that jump represents the estimated effect of the program for people near the cutoff.

WHEN TO USE IT: Use RDD when a randomized controlled trial is impossible, unethical, or impractical. Many real-world policies and programs, from financial aid to healthcare benefits, are already assigned based on a threshold. RDD allows you to analyze the causal impact of these existing programs using observational data, turning a policy rule into a quasi-experiment.

WHEN NOT TO USE IT: RDD fails if people can precisely manipulate their score to get just over the cutoff. If students can easily retake a test to barely pass, the groups on either side of the threshold are no longer comparable; one is now full of more determined individuals. Also, RDD only estimates the effect at the cutoff. It tells you nothing about the program's effect on people far from the threshold, like top performers or those who scored very low.

ONE CANONICAL EXAMPLE: A company gives a performance bonus to all salespeople who exceed 100,000 in sales. To measure the bonus's effect on next year's sales, RDD compares salespeople who sold 101,000 with those who sold 99,000. These two groups are assumed to be very similar in skill and effort. If the 101k group shows a significantly higher sales increase the following year, that difference can be attributed to the motivational impact of receiving the bonus.