Stylized facts
Encyclopedia
In social sciences, especially economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, a stylized fact is a simplified presentation of an empirical finding. A stylized fact is often a broad generalization that summarizes some complicated statistical calculations, which although essentially true may have inaccuracies in the detail.

A prominent example of a stylized fact is: "Education significantly raises lifetime income." Another stylized fact in economics is: "In advanced economies, real GDP growth fluctuates in a recurrent but irregular fashion, with an average cycle length of five to eight years".

As noted above, scrutiny to detail will often produce counterexamples. In the case given above, holding a PhD may lower lifetime income, because of the years of lost earnings it implies and because many PhD holders enter academics instead of higher-paid fields. Nonetheless, broadly speaking, people with more education tend to earn more, so the above example is true in the sense of a stylized fact.

Origin of the term

The term “stylized facts” was introduced by the economist Nicholas Kaldor
Nicholas Kaldor
Nicholas Kaldor, Baron Kaldor was one of the foremost Cambridge economists in the post-war period...

 in the context of a debate on economic growth theory in 1961, expanding on model assumptions made in a 1957 paper.
Criticizing the neoclassical models of economic growth of his time, Kaldor argues that theory construction should begin with a summary of the relevant facts. However, to handle the problem that “facts as recorded by statisticians, are always subject to numerous snags and qualifications, and for that reason are incapable of being summarized”,
he suggests that theorists “should be free to start off with a stylised view of the facts – i.e. concentrate on broad tendencies, ignoring individual detail”.
With respect to broad tendencies that result from such a process, Kaldor coins the term “stylized facts”.

Examples

Stylized facts are widely used in economics, in particular to motivate the construction of a model and/or to validate it. Examples are:
  • Yield curve
    Yield curve
    In finance, the yield curve is the relation between the interest rate and the time to maturity, known as the "term", of the debt for a given borrower in a given currency. For example, the U.S. dollar interest rates paid on U.S...

    s tend to move in parallel
  • Education is positively correlated to lifetime earnings
  • Inventory behavior of firms: “the variance of production exceeds the variance of sales”
  • Econophysics
    Econophysics
    Econophysics is an interdisciplinary research field, applying theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic processes and nonlinear dynamics...

    /Statistical finance
    Statistical finance
    Statistical finance, sometimes called econophysics, is an empirical attempt to shift finance from its normative roots to a positivist framework using exemplars from statistical physics with an emphasis on emergent or collective properties of financial markets...

    begins from stylized facts

Uses

Already in the original paper, Kaldor used his stylized facts of economic growth to argue in favor of his suggested model in comparison to older neoclassical models of economic growth. This idea has been highlighted subsequently by Boland, that the comparative advantages of one model over the other can be set in a clear perspective via the reference of the stylized facts the respective models can explain. Additionally, stylized facts can be used to look "under the hood of models", i.e. be used to validate assumptions of model in a focussed way. This can be of particular importance in more complex models.

Criticism and derivation of stylized facts

Already in an early response Solow pinpointed a possible problem of stylized facts, by stating that there "is no doubt that they are stylized, though it is possible to question whether they are facts." The criticized practice of deriving stylized facts ad hoc is still quite prevalent in economics. Still, some possible approaches to derive stylized facts from empirical evidence have been suggested, such as surveying experts, statistically analysing large data sets (especially suitable for financial markets) or to aggregate both qualitative and quantitative data from different empirical methods by following a systematic process.
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