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Tuesday, October 11, 2011

On the Importance of Knowing the Assumptions

I've been pretty vocal in the past about the importance of understanding what conditions need to be satisfied before you start using some fancy new econometric or statistical "tool". Specifically, in my post, "Cookbook Econometrics", I grizzled about so-called "econometrics" courses that simply teach you do "do this", do that", without getting you to understand when these actions may be appropriate.

My bottom line: you need to understand what assumptions lie behind such claims as "this estimator will yield consistent estimates of the parameters"; or "this test has good power properties" - preferably before you get too excited about using the estimator or test and you cause too much damage. In other words, it's all very well to understand what problems you face in your empirical work (simultaneity, missing observations, uncertain model specification, etc.), but then when you choose some tools to deal with these problems, you need to be confident that your choices will achieve your objectives.