Cheating with Models

Kfir Eliaz, Ran Spiegler () and Yair Weiss

American Economic Review: Insights, 2021, vol. 3, issue 4, 417-34

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.

JEL-codes: C13 C46 C51 D83 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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DOI: 10.1257/aeri.20200635

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