How Much Wood Could a Woodchuck Chuck if a Woodchuck Weighed 850 lbs? Why Linear Regressions Fail At Extrapolation

We are living in an illusion, all data, markets and prices are manipulated and driven by behaviourist ideals. You can only ignore reality for so long, that is until it kicks you in the balls when you’re not looking.

The Consumer Price Illusion

The BLS uses HQA to evaluate a new product using the pricing relationships that existed in the past to value what the new product would have cost in the past. Setting aside the myriad of fundamental arguments one could make against this process, lets look at a bonafide statistical pitfall that Hedonic Quality Regression (HQR) fails to address. At best this introduces a bias into the CPI, and at worst renders the prices used completely misleading.

HQR was introduced by economists to tackle a very real problem: products keep changing configuration with each new cycle. Very few products stay exactly the same throughout time; companies a constantly adding new features as technological boundaries are pushed to new limits.

However, technology has a tendency to create things we have never seen before. We can all find a point where a technology we take for granted today didn’t exist in the past…

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