Daily Speculations
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James Sogi
Philosopher, Juris Doctor, surfer, trader, investor, musician, black belt, sailor, semi-centenarian. He lives on the mountain in Kona, Hawaii, with his family. |
8/22/2005
Why graphical Analysis is important, by Jim Sogi
M. F. Osborne in "The Stock Market and Finance From a Physicist's Viewpoint" and Francis Diebold in Elements of Forecasting , two recent favorites, recommend graphing and eyeballing the data before doing any statistical analysis or choosing a model to use. Everyone looks at the price charts, the basic workhorse of the time series, but when detrending and looking at the first and second moments, "the human eye is a far more sophisticated tool for data analysis and modeling than the most sophisticated modern modeling techniques. Graphical analysis alone will not get the job done, but it is the best place to start." Diebold.p 49. Osborne suggests looking for and studying the outliers, the points of failure as areas rich with new insights.
Anacombes quartet data provide a striking illustration of the need for statistical graphics. Here is the data, (From Diebold) . Nothing seems amiss looking at the data chart. The R2 = .67 and SE of the Regression = 1.24 and is identical for each set. However by looking at the graphs, it is clear that different processes are at work and different models are needed.
A histogram or stem and leaf provides a simple estimate of the probability density of a single variable. Relational graphics, such as Bivariate scatter plots used in Practical Speculation show the relation of two variables. Under certain conditions the conditional mean is a good estimate of the forecast. Diebold says changing the aspect ratio may reveal new information.
Tufte wonderfully discusses graphical style in his series. . See also prior reviews in Daily Speculations.com.
Even Diebold advises, avoid chart junk and non data ink. R has an extensive set of graphic tools which beats the pants of the chart junk heaped in commercial packages which lack even the most basic useful tools. Defenestrate the chart junk! Its ballyhoo.
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Jim Sogi, May 2005
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