Trillion Dollar Economists

Chapter 5Beyond Moneyball

All sciences—social and scientific—have their techniques for validating hypotheses. Economics is no exception. Its practitioners make heavy use of increasingly sophisticated statistical techniques to try to sort out cause and effect and make predictions.

Except in the situations I discuss in the next chapter, empirically oriented economists do not have the luxury of conducting experiments to test their hypotheses, as do their counterparts in the hard physical sciences. Instead, economists must try to tease out relationships and infer behaviors from what is already going on in the real world, which cannot be stopped and restarted to suit the needs of economists who want to know what is really happening.

In this chapter, I will take you through a tour of the statistical method economists most commonly use—regression analysis—first by briefly explaining the concept and its origins, then discussing its use during the heydays of large forecasting models (the era when I learned economics) and later during the waning popularity of those models. I will also discuss how the tools of economics have been used to analyze complex challenges and solve real-world business disputes, in what is called the economic consulting industry. I will then introduce you to the exciting world of sports analytics, in which statistical and economic methods have played a central role. I conclude with an application of the Moneyball concept, popularized by Michael Lewis, to policy ...