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Cheating with Models

Author

Listed:
  • Kfir Eliaz
  • Ran Spiegler
  • Yair Weiss

Abstract

Beliefs and decisions are often based on confronting models with data. What is the largest "fake" correlation that a misspecified model can generate, even when it passes an elementary misspecification test? We study an "analyst" who fits a model, represented by a directed acyclic graph, to an objective (multivariate) Gaussian distribution. We characterize the maximal estimated pairwise correlation for generic Gaussian objective distributions, subject to the constraint that the estimated model preserves the marginal distribution of any individual variable. As the number of model variables grows, the estimated correlation can become arbitrarily close to one regardless of the objective correlation.

Suggested Citation

  • Kfir Eliaz & Ran Spiegler & Yair Weiss, 2021. "Cheating with Models," American Economic Review: Insights, American Economic Association, vol. 3(4), pages 417-434, December.
    • Handle: RePEc:aea:aerins:v:3:y:2021:i:4:p:417-34
    DOI: 10.1257/aeri.20200635
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    Cited by:

    1. Spiegler, Ran, 2022. "On the behavioral consequences of reverse causality," European Economic Review, Elsevier, vol. 149(C).
    2. Majumder, Debasish, 2023. "Subjectivity in conventional tail measures: An exploratory model with 'risks & biases’," Finance Research Letters, Elsevier, vol. 55(PB).
    3. Jordan Adamson & Lucas Rentschler, 2023. "Criminal justice from a public choice perspective: an introduction to the special issue," Public Choice, Springer, vol. 196(3), pages 223-227, September.

    More about this item

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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