Saturday, November 5, 2016

Snakes in a Room

Teachers frequently use analogies when explaining new concepts. In fact, most people do. A good analogy can be quite eye-opening.

The other day my wife was in the room while I was on the 'phone explaining to someone why we often like to apply BOTH the ADF test and the KPSS test when we're trying to ascertain whether a partcular time-series is stationary or non-stationary. (More specifically, whether it is I(0) or I(1).) The conversation was, not surprisingly, relatively technical in nature.

After the call was over, it occurred to me that my wife (who is an artist, and not an econometrician) might ask me what the heck all that gobbly-gook was all about. As it happened, she didn't - she had more important things on her mind, no doubt. But it forced me to think about a useful analogy that one might use in this particular instance.

I'm not suggesting that what I came up with is the best possible analogy, but for what it's worth I'll share it with you.