Errors or Pitfalls

Errors or Pitfalls - the stronger the correlation, the...

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Errors or Pitfalls: In modern times, economics is no doubt being developed on a positive scientific basis. But unlike other physical sciences , economics suffers from a certain weakness. It is after all a science based on human behavior which is not predictable. This makes economic analysis less accurate. There are a variety of other empirical and technical reasons that contribute to its inaccuracy. Most of the economic theories are tailor-made to suit competitive market conditions. But the markets in reality are likely to consist of imperfections . The knowledge of the economic agents, the mobility of resources, the availability of information, future uncertainties, changes in tastes and technical conditions are some of the causes of imperfection in the market system. A technical error arises out of the statistical and theoretical tools employed. In algebraic and geometric methods the degree of precision depends on the degree of correlation between the two variables:
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Unformatted text preview: the stronger the correlation, the greater the predictive value of any change. But sometimes, the correlation coefficient may lead one to false predictions. In that case, it is called a spurious correlation. Economic realities are sometimes not amenable enough to be able to fit into the technical requirements of mathematical or statistical precision. Two specific pitfalls that one can encounter in economic analysis are fallacy of composition and false-cause fallacy . The first one refers to the assumption that if one company will gain from a particular policy, other related companies will gain as well. However, this may not always be the case. The second one refers to a condition when two events are positively correlated or appear simultaneously. In such a case, they may be assumed to have a causal relation as well. However, this is again a false assumption: one needs to look at other related components as well....
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This note was uploaded on 11/17/2011 for the course EC ec 201 taught by Professor - during the Fall '10 term at Montgomery.

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