Categories
Economics

[2752] Dude, where is my standard error?

When the economy grew 6.4% from a year ago, does it really mean it grew exactly at that rate?

Those kinds of statistics are supposed to give us the hard figures that we all can fall back as the one and only truth. Like the physical ones where a meter ruler is a meter long. But those with statistical learning would understand these macro numbers, from the GDP to industrial production to prices are not free from errors (even the ruler has an error but I would think that error here would be considerably smaller compared to that suffered by macro numbers, unless, it is an astonishingly bad ruler). The GDP for instance is not exactly an account of a small company that has in it all of the company’s expenditure. That macro figure is at best an estimation of what is happening in the economy. The fact that we keep restating (not rebasing) the GDP figures every now and then tells you that just as much.

Yet, after working in the financial sector, I am quite surprised to learn at how standard error/standard deviation plays a minuscule role in most analyses. I think this is a problem because without reference to errors, data providers in various government agencies as well as analysts and economists in the financial market give the illusion that their data and their analyses (strictly non-normative commentary of the data) come with absolute confidence (academic economists have better record at this). When the economy grew at 6.4% in a period, it is 6.4%.

But that confidence is overblown. It is not really 6.4% exactly. The truth is that it is possible the GDP had grown around that figure. What exactly, nobody knows. Maybe that is a technological question that would be solved some time in the future. In the meantime, there are some errors in the data.

Before we go on further, for the benefits of those without basic statistical training, I want to emphasize that these errors are not mistakes. They are simply uncertainty that comes along with the data. Uncertainties are there because we cannot know everything about the world. But we can know enough to know about the general situation. Hence the usefulness of these inexact macro figures. I call it inexact, because the true figures fall within a range and it is a stretch to suggest a point figure is the true figure with certainty.

I have no doubt that these economists, analysts and statisticians understand the meaning of errors and its importance. I am not overly worried about this group who work revolves around data. They know there are revisions and they know the numbers can change. They know there are errors. They know these macro numbers provide a useful guide to the happenings in the economy and these figures are not exact numbers. It is more of a sample — a good sample to generalize the population — rather than the actual universe. Whenever they refer to a number, they have the statistical caveat at the back of their mind.

I worry about the non-expert consumers of these data and analyses. These users do not understand this and they take the figures put down as the truth. Consider for example the discontent against the inflation rate in Malaysia, where there are critics who claim it is too low. I think the publication of standard errors of consumer prices would partly help address their concerns by telling them that there is uncertainty in the recorded prices. Still, this will not address the criticism against the CPI too much because the critics also appear fail to understand that the weight of the final CPI number is in such a way that it measures the middle Malaysians. But we have enough microdata that those weights can be reconstructed to fit more than the middle Malaysian. But I think this is a different issue which I have addressed in the past.

I am bringing up the non-reporting of standard error/standard deviation issue because I am bit peeved when I see news reports that goes something like ”Malaysian industrial production growth grew slower at 4.3% from 4.4% last month.” Or the GDP grew faster at 6.4% in 2Q versus 6.2% in 1Q. I mean really, is it truly a deceleration/acceleration? Are we not just sensationalizing it? I am particularly annoyed when economic-illiterate politicians start to sensationalize these figures, spreading uninformed views to the wider public.

(Another example is the idea that China is the largest economy in the world in PPP terms. But how about including the standard error inside too before making that pronouncement? I bet Chinese GDP has an outrageously big interval.)

Is it not enough just to say, ”hey, the economy is doing okay”?

When I see that kind of changes, I am more inclined to say it is stable. In fact, we can get more scientific about it. Calculate the index’s standard deviation and do hypothesis testing to see if the change is significant or not. It is very easy to do such testing these days.

I admit, it is less sexy and mouthful to say ”there is X% probability that the economy grew faster compared to the rate in previous period”, than to say ”the economy grew faster today versus yesterday.” But are we sacrificing truth for sexy, short, punchy, headlines?

I think yes.

I am guilty of not providing the standard deviation too, but I think we (can I use the pronoun we?) need to change our ways. Yes, I think we mainly write for each other, but we have to realize, these writings go out to the public as well. Our statistical caveat might not exist in others’ mind. We need to put those caveats explicitly in the open.

By sharing the standard deviation, I also think it shows others that we are being humble about our data. It says, “these are my best bets” instead of “this is it and there is no other way about it.”

Ideologically, from libertarian point of view, the humbleness is important. Libertarians believe in the superiority of the market over state actions. My belief (before I get banged up for being a blind market apostle, there are instances of market failure where the government needs to come in) in the superiority comes partly from the fact that we do not know everything about the world. I think the idea of standard error is part of that philosophy: the idea that we do not know everything. Again, there might be a time when technology will solve that and bring about a libertarian nightmare, but right now, there are enough cases out there to tell us to be humble.

Categories
Politics & government Sci-fi

[2098] Of one data point

I am unsure if I am recalling this accurately but at back in my mind, amid cobwebs of vague memories, I somehow remember reading an Asimov’s short story in a stuffy old library at the Malay College in Kuala Kangsar. You will forgive me if it is not even Asimov’s writing. It may well be a work of some other science fiction author. What I do have vivid recollection is the subplot of the story, however. Through the retelling of it, I hope that it may cause others to refrain from committing hasty generalization.

The story is set some time in the far future, maybe on Earth, maybe on Trantor or at some other place, I do not know. What is important is that the realm of human knowledge has expanded greatly. This includes in the field of statistics and in particular, sampling methods used to ascertain public opinion.

Sampling methods used today in real life suffer from certain errors arising from randomness and uncertainty. Notice how each time a respectable polling agency in reports result of a survey, it includes the margins of error of the findings, or more accurately, the standard errors, along with the averages. In the science fiction, statisticians of the future have developed a way to eliminate, fully, the errors associated with sampling.

In fact, the field of statistics in that fiction has reached a stage so advanced that the opinion of the public can be gauged accurately by simply sampling a person, who is a member of the public. In other words, all that is required to make general inference about the society is just one data point.

A sample size of one and that is it.

One.

Only one.

1Malaysia!

Oh my, I do not know how that gets in there.

Anyway, unfortunately in real life, reliability of a sample and therefore, the ability to generalize its statistics for inferential purposes decrease as the sample size decreases, more so at some range closer to zero. We are still finding ourselves a long way from living a statistician’s wet dream.

Yet, all too often in Malaysia today, individuals are quick to generalize the result of a by-election to describe national mood. It is perhaps acceptable to make an inference out of a series of by-elections held within a certain timeframe but it is dangerous to make a claim that a by-election signals a countrywide trend. It is dangerous because it is misleading.

A by-election only gauges the opinion of a certain type of individuals and these individuals are certainly not representative of the whole country. The voters in Bagan Pinang, from instance, are quite different from voters of Manei Urai, Datok Keramat, Damansara Utama or Likas. Although the national issues that they care about may coincide, their attitude toward the same issues is not the same due to their worldviews. And then, there are local issues. It is definitely safe to say that local issues that they face are different enough that one-size-fits-all approach is doomed to failure.

These voters, taken as whole, may provide some concrete statistics on the direction of national politics but individually in isolation, they are not so helpful.

With respect to Bagan Pinang, there are many other differentiating factors that further make result of its by-election unique to itself. As an example, not many areas have an army camp resides within its boundary. Another is its status as resort town, or rather, a resort town full of abandoned projects. Suffice to say, Bagan Pinang is not Malaysia.

Therefore, I have to disagree to sweeping statements made by multiple persons after the election. In The Star, Isa Samad was quoted as saying “The people of all races have spoken and this is an endorsement of the Prime Minister’s 1Malaysia concept.”[1] Deputy UMNO President Muhyiddin Yassin meanwhile said, “This is a significant victory and more importantly the people’s endorsement of the Prime Minister’s policies.”[2]

Perhaps, the people they are referring to are restricted to the voters of Bagan Pinang only. If it refers to Malaysians as a whole, then these two politicians and others who share similar tendency to generalize in so grandly a manner will have a hard time rationalizing trends in other areas.

This is not to say information from Bagan Pinang is worthless. It is not to say information that Bagan Pinang provides with national politics in mind is worthless. Rather, information from this by-election should be contextualized by taking into account several past and future by-elections held at different places if it is to make national sense. Without such contextualization, the one data point of Bagan Pinang might as well be a noise, or an outlier.

In the meantime, save a national election itself, the best barometers of national mood are countrywide surveys done properly. Unless, of course, we are living in a world created by that science fiction.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — Isa thanked the people of Bagan Pinang for the victory, saying it was a win for Prime Minister Datuk Seri Najib Tun Razak’s 1Malaysia concept.

“The people of all races have spoken and this is an endorsement of the Prime Minister’s 1Malaysia concept,” he told reporters.

Isa also thanked the Barisan machinery for working tirelessly during the by-election.

“I’m also happy that the Malays, Chinese and Indians are now with Barisan. I hope this will have a domino effect for Barisan in the future,” he said. [Polling Day Live Coverage: Isa wins with thumping majority. Sarban Singh. Zulkifli Abd Rahman. The Star. October 11 2009]

[2] — A beaming Deputy Prime Minister Tan Sri Muhyiddin Yassin, who was present when the official results were announced just after 8pm, said the people had endorsed Prime Minister Datuk Seri Najib Razak’s 1Malaysia concept.

“This is a significant victory and more importantly the people’s endorsement of the Prime Minister’s policies. I congratulate the people of Bagan Pinang, including the Indians and Chinese, who came out in full support of Barisan,” he said at the tallying centre at the Port Dickson Muncipal Council hall. [Thumping win for Isa. Wong Sai Wan Sarban Singh. Zulkifli Abd Rahman. A. Lechutmanan. The Star. October 12 2009]

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on October 12 2009.