The main reason why almost all econometric models are wrong

13 July, 2018 at 09:33 | Posted in Statistics & Econometrics | 3 Comments

How come that econometrics and statistical regression analyses still have not taken us very far in discovering, understanding, or explaining causation in socio-economic contexts? That is the question yours truly has tried to answer in an article published in the latest issue of World Economic Association Commentaries:

The processes that generate socio-economic data in the real world cannot just be assumed to always be adequately captured by a probability measure. And, so, it cannot be maintained that it even should be mandatory to treat observations and data — whether cross-section, time series or panel data — as events generated by some probability model. The important activities of most economic agents do not usually include throwing dice or spinning roulette-wheels. Data generating processes — at least outside of nomological machines like dice and roulette-wheels — are not self-evidently best modelled with probability measures.

EGOBILD2017When economists and econometricians — often uncritically and without arguments — simply assume that one can apply probability distributions from statistical theory on their own area of research, they are really skating on thin ice. If you cannot show that data satisfies all the conditions of the probabilistic nomological machine, then the statistical inferences made in mainstream economics lack sound foundations.

Statistical — and econometric — patterns should never be seen as anything other than possible clues to follow. Behind observable data, there are real structures and mechanisms operating, things that are — if we really want to understand, explain and (possibly) predict things in the real world — more important to get hold of than to simply correlate and regress observable variables.

Statistics cannot establish the truth value of a fact. Never has. Never will.


  1. Gott Lars! Hoppas de tog till sig från kloke P. Syll, men befarar det var att kasta mynt i en tom brunn!

  2. Tror du får skaffa pipskägg för att de skall lyssna på dig och bli mer pompös 🙂 !

  3. I clicked thru and read the whole article, finding it well worthwhile reading.
    Inevitably, you got a comment to the effect, (my paraphrase:) “everyone knows all that; nothing new; where’s your alternative?” Classic and sad at this late date.
    Claims of rigor do not seem credible in the face of this stubborn refusal to give up failed theories and methods when faced with a thorough and valid critique.

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