Econbrowser: “On R squared and Economic Prediction”

There’s s a good, short post on Econbrowser on understanding the commonly cited statistical measure known as “R squared” (R2) Many people work under the assumption that any estimated regression with a high R2 means that the model that produced the sequence is a good predictor of a future outcome. This assumption, notes the author, is not always correct.


As noted:

It’s very helpful to look critically at which magnitudes we can predict and which we can’t, and at whether that predictability or lack of predictability is consistent with our economic understanding of what is going on. But if what you think you learned in your statistics class was that you should always judge how good a model is by looking at the R-squared of a regression, then I hope that today you learned something new.

Keeping statistical concepts straight is an important task for anyone in today’s highly quantified world, so kudos to the author for this timely reminder.

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