Error Costs, Legal Standards of Proof and Statistical Significance

42 Pages Posted: 21 Apr 2017 Last revised: 22 Jul 2017

See all articles by Michelle Burtis

Michelle Burtis

Charles River Associates (CRA) International

Jonah B. Gelbach

University of Pennsylvania Law School

Bruce H. Kobayashi

George Mason University - School of Law

Date Written: April 21, 2017

Abstract

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

Burtis, Michelle and Gelbach, Jonah B. and Kobayashi, Bruce H., Error Costs, Legal Standards of Proof and Statistical Significance (April 21, 2017). Supreme Court Economic Review, Forthcoming; George Mason Law & Economics Research Paper No. 17-21; U of Penn, Inst for Law & Econ Research Paper No. 17-22. Available at SSRN: https://ssrn.com/abstract=2956471 or http://dx.doi.org/10.2139/ssrn.2956471

Michelle Burtis

Charles River Associates (CRA) International ( email )

1201 F. St. NW
Ste. 700
Washington, DC 20004
United States

Jonah B. Gelbach

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States

Bruce H. Kobayashi (Contact Author)

George Mason University - School of Law ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8034 (Phone)
703-993-8088 (Fax)

HOME PAGE: http://mason.gmu.edu/~bkobayas

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