Study: Most Published Results in Financial Economics are Wrong

Danielle Kurtzleben writes at VOX:

In a new NBER paper, Duke University Finance Professor Campbell R. Harvey, University of Oklahoma Assistance Finance Professor Heqing Zhu, and Texas A&M Assistant Professor of Marketing Yan Liu come to the conclusion that a majority of papers in financial economics are wrong.

Of course they are. Austrian school economists have long taught that you can't forecast or develop theory based strictly on empirical data. It is faulty methodology.

SEE:

 The Counter Revolution of Science by Friedrich Hayek

The Ultimate Foundation of Economic Science by Ludwig von Mises

Economic Science and the Austrian Method by Hans-Hermann Hoppe

 Kurtzleben continues:

Harvey and his co-authors studied 315 papers that examine different factors that might predict returns on stocks. Those papers propose all sorts of different potentially predictive variables, like leverage and price-to-earning ratios....

Harvey and his co-authors found that study authors have not been using rigorous enough standards in determining statistical significance. As a result, they write, "most claimed research findings in financial economics are likely false."

The reason is that in trying to figure out what exactly is correlated with high returns, academics and finance gurus often compare many different variables. The statistical tests usually are significant at the 5 percent level, Harvey says. That means that when a variable is shown to be statistically significant, there's a 5-percent chance of seeing that (or a bigger) result in the numbers, even if there is no real effect present. That's pretty low odds if you're just running one test, but if you use powerful computers to run hundreds of tests, you're sure to find some "significant" relationships that are just random noise.