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A Multicriteria Approach to Model Specification and Estimation

  • Robert Kalaba

    (Departments of Electrical and Biomedical Engineering, Univ. of Southern Cal.)

  • Leigh Tesfatsion

    (Department of Economics and Department of Mathematics, Iowa State Univ.)

In decision theory, incommensurabilities among conflicting decision criteria are typically handled by multicriteria optimization methods such as Pareto efficiency and mean-variance analysis. In econometrics and statistics, where conflicting model criteria replace conflicting decision criteria, probability assessments are routinely used to transform disparate model discrepancy terms into apparently commensurable quantities. This tactic has both strengths and weaknesses. On the plus side, it permits the construction of a single real-valued measure of theory and data incompatibility in the form of a likelihood function or a posterior probability distribution. On the minus side, the amalgamation of conceptually distinct model discrepancy terms into a single real-valued incompatibility measure can make it difficult to untangle the true source of any diagnosed model specification problem. This paper discusses recent theoretical and empirical work on a multicriteria ``flexible least squares'' (FLS) approach to model specification and estimation. The basic FLS objective is to determine the ``cost-efficient frontier,'' that is, the set of estimates that are minimally incompatible with a specified set of model criteria. The relation of this work to previous work in econometrics, statistics, and systems science is also clarified.

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Paper provided by EconWPA in its series Econometrics with number 9501001.

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Length: 28 pages
Date of creation: 13 Jan 1995
Date of revision:
Handle: RePEc:wpa:wuwpem:9501001
Note: 28 pages, all in LaTeX; Two additional figures available from the second author upon request.
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Tesfatsion, Leigh S. & Veitch, J., 1990. "U.S. Money Demand Instability: A Flexible Least Squares Approach," Staff General Research Papers 11193, Iowa State University, Department of Economics.
  2. Kalaba, Robert & Tesfatsion, Leigh, 1988. "The flexible least squares approach to time-varying linear regression," Journal of Economic Dynamics and Control, Elsevier, vol. 12(1), pages 43-48, March.
  3. Seiford, Lawrence M. & Thrall, Robert M., 1990. "Recent developments in DEA : The mathematical programming approach to frontier analysis," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 7-38.
  4. Kalaba, Robert & Rasakhoo, Nima & Tesfatsion, Leigh, 1989. "A FORTRAN program for time-varying linear regression via flexible least squares," Computational Statistics & Data Analysis, Elsevier, vol. 7(3), pages 291-309, February.
  5. James S. Dyer & Peter C. Fishburn & Ralph E. Steuer & Jyrki Wallenius & Stanley Zionts, 1992. "Multiple Criteria Decision Making, Multiattribute Utility Theory: The Next Ten Years," Management Science, INFORMS, vol. 38(5), pages 645-654, May.
  6. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
  7. Kalaba, R. & Tesfatsion, L., 1989. "A Multicriteria Approach To Dynamic Estimation," Papers 8904, Southern California - Department of Economics.
  8. Leamer, Edward E, 1985. "Sensitivity Analyses Would Help," American Economic Review, American Economic Association, vol. 75(3), pages 308-13, June.
  9. Kalaba, R. & Tesfatsion, L., 1988. "An Organizing Principle For Dynamic Estimation," Papers m8818, Southern California - Department of Economics.
  10. Korhonen, Pekka & Moskowitz, Herbert & Wallenius, Jyrki, 1992. "Multiple criteria decision support - A review," European Journal of Operational Research, Elsevier, vol. 63(3), pages 361-375, December.
  11. Charnes, A. & Cooper, W. W. & Golany, B. & Seiford, L. & Stutz, J., 1985. "Foundations of data envelopment analysis for Pareto-Koopmans efficient empirical production functions," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 91-107.
  12. Kalaba, Robert E. & Tesfatsion, Leigh S., 1989. "Time-Varying Linear Regression Via Flexible Least Squares," Staff General Research Papers 11196, Iowa State University, Department of Economics.
  13. Kalaba, Robert E. & Tesfatsion, Leigh S., 1990. "Flexible Least Squares for Approximately Linear Systems," Staff General Research Papers 11190, Iowa State University, Department of Economics.
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