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Black Swan economics | Financial Post

Economists are not always consistent in applying logic. We are all instructed in econometrics class that, when applying standard statistical techniques, you should reflect on whether the data have a normal distribution. For over a decade, it has been a crusade of Taleb’s that once you introduce skewness, which applies to almost all economic phenomenon, it is erroneous to assume the data have a normal distribution, on which the most common statistical techniques depend. This may be why econometrics has never been decisive in settling any economic question of consequence, according to Larry Summers, widely-touted as possibly the next head of the Federal Reserve Board.

One reason social scientists are so wedded to the normal distribution is it validates results drawn from small samples. A recent paper on the challenging topic of intergenerational mobility had only 13 sample points to support its main conclusion. But small samples likely don’t include the rare events that preoccupy much of Taleb’s thinking. By his standards, research based on small samples is little more than anecdotes; “Social scientists need to have a clear idea of the difference between science and journalism, or the one between empiricism and anecdotal statements. Science is not about making claims about a sample, but using a sample to make general claims and discuss properties that apply outside the sample.”

via Black Swan economics | Financial Post.

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