EC 331: Research in Applied Economics

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1 EC 331: Research in Applied Economics Terms 1 & 2: Thursday, 1-2pm, S2.133 Vera E. Troeger Office: S v.e.troeger@warwick.ac.uk Office hours: Friday am

2 Research Design The Purpose of (Social) Science development of useful and valid theories reduction of complexity explanation of (single) cases derivation of correct predictions derivation of useful prescriptions else? Note: all these purposes can be reduced to the first purpose!

3 The Problem of Inference Scientific research is designed to make descriptive of explanatory inferences on the basis of empirical information about the world. (KKV 7) Inference is the generalization of observations. Therefore, inference provides one way of formulating theories. Consistent deductions from a set of assumptions provide another way.

4 Models of Theory Development and Validation: Observation -> Explanation -> Generalization -> Prediction -> Test Note: one cannot test an explanation/generalization based on the information that were used for the inductive formulation of a theory. Example: Democratic Peace This process is called induction. Assumptions -> Causal Mechanism -> Prediction -> Selection of Useful Cases -> Test Example: Downs Economic Theory of Democracy This process is called deduction.

5 Deductive approach THEORY (supplying initial theoretical assumptions) Inductive approach Empirical Observation (of a sample of the instances for which a governing law is sought) Predictive hypotheses Predictive hypotheses specific observations Deductive logic: If X then Y (hypothesis) Y (observation) Then X THEORY (a statement of governing laws) Incuctive logic: All observed X -> Y (observation) X always -> Y (generalization) X causes Y (inductive inference) Source: Hay, C. 2002: Political Analysis: A Critical Introduction, Palgrave, p. 31.

6 Social Science Theories What is a theory? Conditions: -- assumptions -- causal mechanism (explanation) -- derived hypotheses (predictions)

7 Consequences: Theories must be consistent (predictions need to follow from assumptions, not tautological (predictions need to be logically distinguishable from assumptions) falsifiable (probability of predictions being wrong must be positive) Theories should be -- parsimonious (they should consist of as many elements as necessary, but not more) -- non trivial (the consumer of theories should learn something) -- useful? -- elegant?

8 Assumptions Are part of the core of a theory and therefore often un-testable Theoretical arguments are always based on implicit or explicit assumptions (e.g. About behaviour of actors etc.) It is desirable to make assumptions of a theory explicit Basic assumptions often follow from the underlying paradigm Example: actors behave instrumentally rational, institutional and cultural background forms preferences and behaviour of actors, knowledge is always partial and never neutral, the political world is a product of social construction

9 Causality Basic rules for causal explanation the perspective of Jon Elster: Causal explanations must be distinguished from true causal statements Causal explanations must be distinguished from assertions about correlations Causal explanations must be distinguished from assertions about necessities Causal explanations have to be distinguished form story telling Hume s perspective: When ever the assumed cause is observed the effect must be observed as well The cause must temporally precede the effect (this principle is employed in time series analyses Granger-Causality) Mill s perspective: Cause must precede effect There must exist a relationship between cause and effect (causal mechanism) Rival causes must be eliminated (underdetemination) These conditions lead to: a)method of concordance: if cause then effect b)method of distinction: if no cause then no effect c) Method of simultaneous variation: if a) and b) are simultaneously fulfilled the explanation gets stronger because rival explanations can be eliminated more easily

10 Coleman s Bathtub, Friedman and Falsification Coleman, James S., 1990: Foundations of social theory. Cambridge, MA. Colman s bathtub relates the micro- and macro- level of causal explanation, thus it relates structural and individual levels of explanation, example: conflict probability in the international system. Macrolevel Microlevel

11 Variables that influence Individuals Outcome: Social Phenomenon influence choice aggregation Utility Functions Aspirations expectations Social Interaction

12 Likelihood of conflict in the international system Polarity of the international system (1) likelihood of conflict (2) (4) governments (3) behaviour of governments 1)Systemic relationship, structural hypothesis 2) contextual hypothesis 3) actors hypothesis 4)Aggregation hypothesis

13 Milton Friedman: Useful theories can be built on wrong assumptions. In principle, one can test all levels of theories: - the environment of individual choice can be misrepresented - the individual s utility function can be wrong - assumption on the set of relevant actors and/or their behavioral repertoire can be wrong - aggregation can be wrong However: a theory provides insights into (at least one) relevant causal mechanism. This insight can be useful AND make correct predictions even if the assumptions are wrong. Moreover: theories need to simplify, therefore: assumptions need to simplify as well.

14 Falsification versus Verification Popper It is easy to obtain confirmations, if we look for them. Confirmations should count only if they are the result of risky predictions. Every good scientific theory is a prohibition. (TP: it makes negative predictions. Example: event a will not happen) A theory which is not refutable is not scientific. (TP: example: Event a is an act of god. Event a happened because it was in the interest of agent b. Event a happened because the country was of type c.) A genuine test of a theory is an attempt to falsify it.

15 What does count as falsification or verification? Unfortunately, only a negligible small share of social science theories are deterministic, most of them are probabilistic. Deterministic theories: If a, then always b, because probabilistic theories: a increases the probability of b, because Deterministic theories can be falsified by one deviant case. Probabilistic cannot be falsified by one deviant case. What to do?

16 The Purpose of Research Designs A good research design: provides the toughest test for the theory, aims at maximizing the difference between prior and posterior makes valid inferences (avoids errors of type I and type II) tests the theory against a non-trivial nil hypothesis uses all available information efficiently

Scientific Explanation- Causation and Unification

Scientific Explanation- Causation and Unification By Wesley Salmon Analysis by Margarita Georgieva, PSTS student, number 0102458 Van Lochemstraat 9-17 7511 EG Enschede Final Paper for Philosophy of Science