Cabbages: When K is Greater than N

I didn’t know what this was a few weeks ago, but a hat tip to Arnold Kling for showing how this information is useful.

In Stats, we learned that the degrees of freedom is equal to n (the number of observations) – k (the variables included in an equation).

So far, so good.

But Kling brings up the age old statistics problem:  what happens when K is greater than N, and degrees of freedom becomes negative?

That is the problem we run into with macroeconomic models.  There are not that many observations of the economy (so a low N), while the possible variables within the economy are almost infinite (K is really big).  So DF is negative!  Basically, when this happens, you can’t trust your source, or whoever is producing these numbers.

So next time you are listening to a talking head, remember that there aren’t nearly enough observations of the economy to predict the future.  Just use your basic principles!

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