Friday, February 17, 2012

The Neyman-Pearson Lemma: An Economic Perspective

In my graduate-level "Themes in Econometrics" course we've been talking recently about the Neyman-Pearson Lemma.  In 1933 Jerzy Neyman and Egon Pearson published one of the most important papers of modern statistics, referenced below. Specifically, they showed that we can use the likelihood ratio to construct the Most Powerful test (for a given significance level), when we are testing a point null hypothesis against a point alternative hypothesis. This set the scene for classical hypothesis testing as we practice it today.