[Must the Diffusion Index Lead?

]: Rejoinder
Author(s): Stefan Valavanis
Source: The American Statistician, Vol. 11, No. 4 (Oct., 1957), p. 17
Published by: Taylor & Francis, Ltd. on behalf of the American Statistical Association
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 But there are various ways of learning more about
these matters, not a single way. Something can indeed be
learned by constructing simple cases, and by assuming
certain mathematical properties exist, and by inferring
what would happen if the real world were like that.
These tools have long had a respectable place in eco-
nomic research, and I expect they always will. This is
especially true when one is exploring the implications of
a new statistical device, such as a diffusion index. For
example, perhaps Mr. Valavanis' simple mathematical
examples will prevent many from jumping to the conclu-
sion that exploring the properties of diffusion indexes
constructed from economic data is of no interest because
the diffusion index is a simple proxy for the rate of
change in the aggregate.
Nevertheless, I am persuaded that this is not the
only way to make progress in economic research. A
great many of the findings of Mitchell and others about
business cycles, for example, have stood the test of time
and provided a valuable understanding of economic de-
velopments in a period subsequent to that from which
they were derived, yet few if any have depended on the
investigator's knowledge of the "stochastic properties" of
REJOINDER
To look for quick, cheap and simple shortcuts to
economic forecasting is a reasonable research endeavor.
It is perfectly justified to record and publish which indi-
cators and which combinations of them have in the past
tended to lead. The diffusion indexes so far published
by the National Bureau do show interesting leads over
the sum of their components, both within the sample
period and beyond it.
Two considerations disturb me, however. First, only
the successful diffusion indexes get shown. Second, the
unsatisfactory indexes contain information about the
reliability of the satisfactory ones.
I don't know how many indexes Dr. Moore or anyone
else discards for every one that he adopts, but the more
he discards the less should he defend the diffusion index
in general. It is a perfectly wise research strategy to
try many things and discard many. However, the
belief-worthiness of what is retained is not independent
of what was thrown out. This is why I like "stochastic
specification"; with it you can tell success by chance
from success by genuine discovery. Now, Dr. Moore's
"consilience with other data", "repetitive character",
and "reasonableness in the light of knowledge of eco-
nomic processes and policies" are precisely the stuff from
which stochastic specification is worked out-only per-
haps more systematically. "Interpreting the mathemati-
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economic time series. Many other tests are available to
guide one's judgment as to whether results are to be
taken seriously-their consilience with other data, or
with similar data from a different time or a different
place; their repetitive character; their reasonableness in
the light of knowledge of economic processes and poli-
cies. These tests may not yield estimates of mathe-
matical probability, yet I wonder if this is really a differ-
ence. For the probabilities computed from a mathe-
maticized system must also be "interpreted"in the light
of the known simplifications built into the model. They
may be precise for the model, but in view of the simpli-
fications that are almost inevitably required to obtain
results, we know in advance that the model is not a
precise imitation of "reality." A judgment as to how
seriously the results should be taken is called for in
the one case as in the other.
Those who place a heavy weight on mathematical
probabilities, and those who are impressed by tests whose
probability they do not know how to evaluate can there-
fore work side by side, and each can take the other's
results "seriously."9
STEFAN VALAVeANIS
Harvard Univer-sity
cal probability" of his results is essentially the same
thing as judgment based on consilience etc., only-I be.
lieve-clearer and more systematic.
When I consider the treatment that a time series
receives in the hands of Dr. Moore and his associates, I
find it extremely well adapted to the stochastic test that
I favor. Every series that enters this or that diffusion
index has already been analyzed into its several com-
ponents, when it was being screened for conformity etc.,
early in its elaboration. In fact all the ingredients of
the recipe in the last formula of page 15 are ready on
hand. What is missing is a chef to tell us beforehand
what sort of pudding to expect from them-whether, for
instance, so many raisins per slice are just a freak, or
something inherent in the logic of baking the mixture.
Likewise, we can combine the various (known) m, M, T, e
characteristics of each series into beforehand knowl-
edge about the covariation of the aggregate S and the
corresponding diffusion index.
To derive the covariation is staggeringly complicated
for the general case, but quite simple, though tedious,
for special numerical values of mi, Mi, etc. Any mechani-
cal computer can quickly generate the appropriateproba-
bility tables by merely combining in all possible ways a
few representative values of the disturbances, or irregu-
larities, which I have denoted by u (t).
17