Let's Take the Con Out of Econometrics

Abstract

Econometricians would like to project the image of agricultural experimenters who divide a farm into a set of smaller plots of land and who select randomly the level of fertilizer to be used on each plot. If some plots are assigned a certain amount of fertilizer while others are assigned none, then the difference between the mean yield of the fertilized plots and the mean yield of the unfertilized plots is a measure of the effect of fertilizer on agricultural yields. The econometrician's humble job is only to determine if that difference is large enough to suggest a real effect of fertilizer, or is so small that it is more likely due to random variation. This image of the applied econometrician's art is grossly misleading. I would like to suggest a more accurate one. The applied econometrician is like a farmer who notices that the yield is somewhat higher under trees where birds roost, and he uses this as evidence that bird droppings increase yields. However, when he presents this finding at the annual meeting of the American Ecological Association, another farmer in the audience objects that he used the same data but came up with the conclusion that moderate amounts of shade increase yields. A bright chap in the back of the room then observes that these two hypotheses are indistinguishable, given the available data. He mentions the phrase identification problem, which, though no one knows quite what he means, is said with such authority that it is totally convincing. The meeting reconvenes in the halls and in the bars, with heated discussion