Efficiency comparisons by Monte Carlo simulation
Overview
In this post, I show how to use Monte Carlo simulations to compare the efficiency of different estimators. I also illustrate what we mean by efficiency when discussing statistical estimators.
I wrote this post to continue a dialog with my friend who doubted the usefulness of the sample average as an estimator for the mean when the data-generating process (DGP) is a \(\chi^2\) distribution with \(1\) degree of freedom, denoted by a \(\chi^2(1)\) distribution. The sample average is a fine estimator, even though it is not the most efficient estimator for the mean. (Some researchers prefer to estimate the median instead of the mean for DGPs that generate outliers. I will address the trade-offs between these parameters in a future post. For now, I want to stick to estimating the mean.)
In this post, I also want to illustrate that Monte Carlo simulations can help explain abstract statistical concepts. I show how to use a Monte Carlo simulation to illustrate the meaning of an abstract statistical concept. (If you are new to Monte Carlo simulations in Stata, you might want to see Monte Carlo simulations using Stata.) Read more…