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s but when causal mechanisms operate in the real world they mostly do so in ever changing and unstable ways if economic regularities obtain they do so as a rule only because we have engineered them for that purpose outside man made nomological machines they are rare or even non existent model reification in econometrics is evident when properties that belong strictly to models are treated as if they were real world features econometricians standardly aim to export model based mechanisms to target systems without change this metaphor itself implies reification the gap between model assumptions and messy reality is a gap that econometrics often forgets treating engineered regularities as inherent economic laws is reification pure and simple share on facebook opens in new window facebook share on x opens in new window x share on bluesky opens in new window bluesky why democracy outperforms dictatorship 14 jun 2026 at 10 35 posted in statistics econometrics 1 comment the power of diversity is not merely a social ideal it is a mathematical fact the diversity prediction theorem demonstrates that bringing together people who think differently generates a measurable performance advantage imagine that you fill a transparent jar with 1000 jelly beans and ask a group of students to estimate how many are inside amanda guesses 980 bob 1050 clark 1020 and david 940 individually their estimates are relatively inaccurate however when we treat the students as a collective the average of their guesses is 997 5 remarkably close to the true number the diversity prediction theorem explains why collective error average individual error prediction diversity the accuracy of a group depends both on the average quality of its members judgements and on the extent to which their predictions differ from one another if the students are sufficiently diverse making independent estimates based on different information experiences or perspectives much of the individual error effectively cancels out producing a collective estimate that is closer to the truth from an economic perspective the diversity prediction theorem challenges conventional models of rationality and efficiency diversity is not simply a matter of fairness or representation it generates a tangible advantage the most resilient and innovative economies are those that harness the power of a wide range of perspectives experiences and ways of thinking the diversity prediction theorem also provides a theoretical argument for why democratic systems often have an advantage over dictatorships they can harness the knowledge and perspectives of many different people reducing collective error and improving decision making it does not prove that democracy is always superior but it helps explain why inclusive and participatory political systems standardly outperform rule by a single leader or a narrow elite share on facebook opens in new window facebook share on x opens in new window x share on bluesky opens in new window bluesky rethinking the statistical toolkit 9 jun 2026 at 18 46 posted in statistics econometrics leave a comment alwyn young s 2019 article channeling fisher randomisation tests and the statistical insignificance of seemingly significant experimental results qje 134 2 offers an important methodological warning for economists and other researchers the study focuses on a concept called leverage in simple terms leverage means that some individual data points have a much bigger impact on your statistical results than others young shows that a single data point just one observation can sometimes change your conclusion completely to understand why this matters imagine you have run an experiment and found a result that is statistically significant at the 1 per cent level young demonstrates that if you remove or change just one highly leveraged observation about 35 per cent of such significant results can become insignificant conversely about 16 per cent of originally insignificant results can be turned into significant ones this raises a fundamental question how many published results in economics are actually fragile and might not survive a closer look re examining more than fifty experiments from top economics journals young highlights a serious reproducibility crisis in economics if a single observation can flip a result then the original finding is not robust instead of relying on standard regression methods which we know are sensitive to concentrated leverage young recommends randomisation inference you can read more about this in scott cunningham s causal inference the mixtape pp 148 174 this is a design based technique that uses only the random assignment of treatments in an experiment without making fragile assumptions about how the data are distributed by switching to randomisation tests researchers can obtain more robust and trustworthy p values and avoid being misled by influential outliers young s study forcefully shows one thing always check your model assumptions and especially check whether your results are driven by a single observation share on facebook opens in new window facebook share on x opens in new window x share on bluesky opens in new window bluesky econometrics playing tennis with the net down 17 apr 2026 at 00 26 posted in statistics econometrics comments off on econometrics playing tennis with the net down debating econometrics and its shortcomings yours truly often gets the response from econometricians that ok maybe econometrics isn t perfect but you have to admit that it is a great technique for the empirical testing of economic hypotheses but is econometrics really such a great testing instrument econometrics is supposed to be able to test economic theories but to serve as a testing device you have to make many assumptions many of which themselves cannot be tested or verified to make things worse there are also only rarely strong and reliable ways of telling us which set of assumptions is to be preferred trying to test and infer causality from non experimental data you have to rely on assumptions such as disturbance terms being independent and identically distributed functions being additive linear and with constant coefficients parameters being invariant under intervention variables being exogenous identifiable structural and so on unfortunately we are seldom or never informed of where that kind of knowledge comes from beyond referring to the economic theory that one is supposed to test performing technical tests is of course needed but perhaps even more important is to know as david colander once put it how to deal with situations where the assumptions of the tests do not fit the data that leaves us in the awkward position of having to admit that if the assumptions made do not hold the inferences conclusions and testing outcomes that econometricians come up with simply do not follow from the data and statistics they use the central question is how do we learn from empirical data testing statistical econometric models is one way but we have to remember that the value of testing hinges on our ability to validate the often unarticulated technical basic assumptions on which the testing models build if the model is wrong the test apparatus simply gives us fictional values there is always a strong risk that one turns a blind eye to some of those unfulfilled technical assumptions that actually make the testing results and the inferences we build on them unwarranted haavelmo s probabilistic revolution gave econometricians their basic framework for testing economic hypotheses it still builds on the assumption that the hypotheses can be treated as hypotheses about joint probability distributions and that economic variables can be treated as if pulled out of an urn as a random sample but as far as i can see economic variables are nothing of that kind to be able to draw causal inferences from data econometricians have to use mathematical statistical models but to be useful one also has to go beyond econometric analysis and show that the inferences made in the models also apply to and are compatible with the economic reality the targeted economic phenomena of interest behind the data the data generating process simply performing an empirical test of an economic model is like playing tennis with the net down all economic data are models the ultimate purpose of econometric analysis should therefore not be to test a model as such but to help us assess and evaluate the extent to which the model is compatible with the economic phenomena we are interested in trying to explain running a standard econometric test without verifying whether the model s assumptions match the actual economic process makes it far too easy to claim success the test may give statistically significant results but those results risk being little more than an artefact of the model s own structure not a genuine confrontation with reality data are never raw unfiltered facts they are already shaped by definitions measurement procedures sampling methods imputations and classification choices all of which embody theoretical assumptions gdp figures and unemployment rates are never simply observed they are constructed according to specific conventions when testing an economic model using such data economists are in effect testing one set of modelling assumptions against another set of assumptions we need to ask given what we know about how the data were produced how much confidence can we place in the model s ability to capture the target economic phenomena to answer that we have to use institutional knowledge and historical context the standard econometric practice taking a given model running it on available data and reporting whether the coefficients are statistically significant or whether the model fits according to some goodness of fit measure treats the model as if it were the object of interest in itself but a model is never the final object of interest the real economy is moving beyond testing models as such means treating econometrics as a tool for learning about real world economic mechanisms the net must be raised the purpose of econometric work should shift towards using data to learn how economic processes actually behave including their institutional specificities and historical contingencies otherwise we are merely playing tennis with the net down share on facebook opens in new window facebook share on x opens in new window x share on bluesky opens in new window bluesky how to do econometrics properly 14 apr 2026 at 15 49 posted in statistics econometrics comments off on how to do econometrics properly always but always plot your data remember that data quality is at least as important as data quantity always ask yourself do these results make economic common sense check whether your statistically significant results are also numerically economically significant be sure that you know exactly what assumptions are used needed to obtain the results relating to the properties of any estimator or test that you use just because someone else has used a particular approach to analyse a problem that looks like yours that doesn t mean they were right test test test david hendry but don t forget that pre testing raises some important issues of its own don t assume that the computer code that someone gives to you is relevant for your application or that it even produces correct results keep in mind that published results will represent only a fraction of the results that the author obtained but is not publishing don t forget that peer reviewed does not mean correct results or even best practices were followed dave giles nowadays it has almost become a self evident truism among economists that you cannot expect people to take your arguments seriously unless they are based on or backed up by advanced econometric modelling so legions of mathematical statistical theorems are proved and heaps of fiction are produced masquerading as science the rigour of the econometric modelling and the far reaching assumptions on which they are built are frequently not supported by data modelling assumptions made in statistics and econometrics are more often than not made for reasons of mathematical tractability rather than verisimilitude that is unfortunately also a reason why the methodological rigour encountered when taking part in statistical and econometric research is to a large degree nothing but a deceptive appearance the models constructed may seem technically advanced and very sophisticated but that is usually only because the problems discussed here have been swept under the carpet assuming that our data are generated by coin flips in an imaginary superpopulation only means that we get answers to questions that we are not asking share on facebook opens in new window facebook share on x opens in new window x share on bluesky opens in new window bluesky limits of econometric testing 2 apr 2026 at 00 13 posted in statistics econometrics 1 comment econometricians are of course well aware of the importance of the relationship between the data and the underlying phenomena of interest in the literature this relationship is generally couched in terms of a data generating process dgp if we were to be able to perceive the true dgp in its entirety we would essentially know the complete underlying structure whose observable precipitates are the data our only evidence of the dgp however is the data it is important to note however that characterizing pieces of the data generating process is an intra model activity it reveals the possible mathematical structure underlying a matrix of numbers and it is properly judged according to and only according to the relevant rules of mathematics in contrast the requirement that a relation of homomorphism exist between the data and the underlying phenomena is concerned with the relationship between model and target entities the extent to which data satisfy this requirement in any given case cannot be determined through econometric analysis nor does econometric analysis obviate the need to establish that the requirement is met on the contrary the results of an econometric analysis of a given data set i e the characterization of a piece of its dgp can be validly interpreted as providing epistemic access to the target only if it is plausible that a relation of homomorphism holds between the data and the aspects of the target they ostensibly represent econometrics is supposed to be able to test economic theories but to serve as a testing device one has to make several assumptions many of which cannot be tested or verified to make things worse there are also rarely strong and reliable ways of telling us which set of assumptions is preferred trying to test and infer causality from data we have to rely on assumptions such as disturbance terms being independent and identically distributed functions being additive linear and with constant coefficients parameters being invariant under interven...
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