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Falsifiability

  • Wojciech Olszewski
  • Alvaro Sandroni
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    We examine Popper's falsifiability within an economic model in which a tester hires a potential expert to produce a theory. Payments are contingent on the performance of the theory vis-a-vis data. We show that if experts are strategic, falsifiability has no power to distinguish scientific theories from worthless theories. The failure of falsification in screening informed and uninformed experts motivates questions on the broader concepts of refutation and verification. We demonstrate an asymmetry between the two concepts. Like falsification, verification contracts have no power to distinguish between informed and uninformed experts, but some refutation contracts are capable of screening experts. (JEL B41)

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.2.788
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    Article provided by American Economic Association in its journal American Economic Review.

    Volume (Year): 101 (2011)
    Issue (Month): 2 (April)
    Pages: 788-818

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    Handle: RePEc:aea:aecrev:v:101:y:2011:i:2:p:788-818
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    1. Nabil I. Al-Najjar & Jonathan Weinstein, 2006. "Comparative Testing of Experts," Levine's Working Paper Archive 321307000000000590, David K. Levine.
    2. Alvaro Sandroni, 2003. "The reproducible properties of correct forecasts," International Journal of Game Theory, Springer, vol. 32(1), pages 151-159, December.
    3. Al-Najjar, Nabil I. & Sandroni, Alvaro & Smorodinsky, Rann & Weinstein, Jonathan, 2010. "Testing theories with learnable and predictive representations," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2203-2217, November.
    4. Vladimir Vovk & Glenn Shafer, 2005. "Good randomized sequential probability forecasting is always possible," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 67(5), pages 747-763.
    5. Fudenberg, Drew & Levine, David, 1999. "An Easier Way to Calibrate," Scholarly Articles 3203773, Harvard University Department of Economics.
    6. David S. Ahn, 2008. "Ambiguity Without a State Space," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 3-28.
    7. Eddie Dekel & Yossi Feinberg, 2006. "Non-Bayesian Testing of a Stochastic Prediction," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 893-906.
    8. Ehud Lehrer & Eilon Solan, 2003. "No-Regret with Bounded Computational Capacity," Discussion Papers 1373, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    9. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    10. Rustichini, Aldo, 1999. "Minimizing Regret: The General Case," Games and Economic Behavior, Elsevier, vol. 29(1-2), pages 224-243, October.
    11. Carvajal, Andres & Ray, Indrajit & Snyder, Susan, 2004. "Equilibrium behavior in markets and games: testable restrictions and identification," Journal of Mathematical Economics, Elsevier, vol. 40(1-2), pages 1-40, February.
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