Error Costs, Legal Standards of Proof and Statistical Significance
42 Pages Posted: 21 Apr 2017 Last revised: 22 Jul 2017
Date Written: April 21, 2017
The relationship between legal standards of proof and thresholds of statistical significance is a well-known and studied phenomena in the academic literature. Moreover, the distinction between the two has been recognized in law. For example, in Matrix v. Siracusano, the Court unanimously rejected the petitioner’s argument that the issue of materiality in a securities class action can be defined by the presence or absence of a statistically significant effect. However, in other contexts, thresholds based on fixed significance levels imported from academic settings continue to be used as a legal standard of proof. Our positive analysis demonstrates how a choice of either a statistical significance threshold or a legal standard of proof represent alternative and often inconsistent attempts to balance error costs, and that thresholds based on fixed significance levels generally are not consistent with existing or optimal legal standards of proof. We also show how the statistical testing and legal standards of proof can be reconciled by replacing fixed significance level hypothesis testing with likelihood ratio tests.
Keywords: error cost analysis, fixed significance threshold, law and economics, legal inference, legal standards, null hypothesis statistical testing, standards of proof, statistical inference
JEL Classification: K40, K41
Suggested Citation: Suggested Citation