Saturday, March 31, 2012

Econometric Warriors of Truth

One of the most interesting aspects of Jared Diamond’s work is the fact that there has been no attempt at finding THE truth to THE question of economic growth or collapse. He freely admits that he will not do that and points to multiple sources of causality.

It is unclear to me why economists and econometricians persist on attempting to find THE ultimate cause of some question such as financial crises. Part of the reason they have embraced randomized trials is because they divine that they can finally grasp the answer in their hands instead of exploring the deeper questions of multiple causes or intermediate outcomes that may affect the final outcome of interest.

What is even more surprising from my naive point of view is that while they have become obsessed with exogeneity and strength of their instruments they have moved away from goodness of fit statistics and analysis of variance. What does an econometric model really say when an instrument is strongly exogenous with a large t-statistic but the fit of the model is low? Even more so, what if the variance explained by the instrument is even lower? And to sound even more radical, I am surprised that few have adopted MIMIC models. Is this perhaps because (gasp) it smacks too much of structural equations without microfoundations?

In their pursuit for their idealized version of truth, economists and econometricians have perhaps more than ever acquired an extreme form of tunnel vision are unable to see the forest for the trees.

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