Let’s Take the Con Out of Econometrics

Motivation(s)

Econometricians project the image that they are drawing inferences from experimental data when they are in fact using nonexperimental data. Theorists in this field have interpreted scientific objectivity to mean that an economist must identify exactly the variables in the model, the functional form, and the distribution of the errors. When these assumptions are applied to some data set, the resulting inference will be objective and avoids the researcher’s subjective opinions. One must remember that an objective inference cannot exist because a statistical inference is and must forever remain an opinion.

Proposed Solution(s)

The author asserts that the fundamental problem of econometrics is how to adequately control the whimsical character of inference and sensibly base inferences on opinions when facts are unavailable. One existing solution consists of model sensitivity analysis, but the number of variables become increasingly unwieldy proportional to the model’s complexity.

The author proposes developing a correspondence between regions/sets in the assumption space and regions/sets in the inference space. To mitigate the whimsical nature of choosing a particular sampling or prior distribution, the author recommends applying the Sherlock Holmes inference after studying anomalies of the data; this is the reverse of statistical theory where one needs to specify a model and then study the data within that framework.

Evaluation(s)

Through the use of a set of examples (e.g. randomness, control, degrees of freedom, prior), the author reasoned there is only a single distinction between experimental and nonexperimental data. This difference is what the author labels as the horizon problem, which is only alleviated when applying the Sherlock Holmes inference. A widely recognized method to systematically study the fragility of inference is still lacking.

Future Direction(s)

  • What is a good metric to describe whimsicalness and inference fragility?

Question(s)

  • The results presented in the capital punishment example is quite confusing.

  • Is the horizon problem equivalent to the generalization error?

Analysis

This is a thought provoking paper that changed my view on experimental versus nonexperimental inference. The curriculum I went through have made me too comfortable with accepting the hierarchy proposed in the paper. Putting the uninteresting capital punishment example aside, the author should have examined whether uniform priors would make inference less whimsical; would that trade off the inference’s fragility? The most interesting point was:

  • One should collect all the data, study the anomalies, and then theorize within the proposed guidelines.

Notes

Is Randomization Essential?

  • Randomness allows experimental data to be in the same configuration as nonexperimental data.

  • The former is capable of reducing misspecification (variance) to near zero, which is rarely the case for the latter.

  • When the sampling uncertainty is smaller than the misspecification, it is time to look for other forms of evidence.

  • It is often the case that nonexperimental evidence establishes some belief and then scientists try to verify it with experimental evidence.

Is Control Essential?

  • Establishing a control group does not make a nonexperimental inference into an experimental one because as long as all the interrelationships are accounted for, the evidence (albeit weak) is perfectly valid.

Are the Degrees of Freedom Inadequate with Nonexperimental Data?

  • One can always find a set of observations that makes a model perform poorly, regardless of whether the data is experimental or nonexperimental.

Do We Need Prior Information?

  • Data can reveal the yield at sampled values, but one must resort to subjective prior information when performing any kind of interpolation.

  • The following hierarchy lists what people look for when given the results of an inference: truth > facts > opinions > conventions.

The Horizon Problem: Sherlock Holmes Inference

  • It is a capital mistake to theorize before you have all the evidence since that biases the judgements.

  • The distinction between experimental inference and nonexperimental inference is that the former sensibly admits a conventional horizon in a critical dimension, namely the choice of explanatory variables.

  • Diagnostic tests with explicit alternative hypothesis (e.g. Durbin-Watson) test for first-order autocorrelation; they do not deal with where to terminate the horizon.

  • Diagnostic tests such as goodness-of-fit without alternative hypothesis degenerate into measuring effective sample size.

    • If the sample size is large enough, any maintained hypothesis will be rejected.

  • Studying the anomalies of the data is one way to determine the horizon’s span.

    • However, it is mistaken to analyze a data set as if the horizon were wide enough.

References

Lea83

Edward E Leamer. Let’s take the con out of econometrics. The American Economic Review, 73(1):31–43, 1983.