Medical research continues to progress in its ability to identify treatments and characteristics associated with benefits and adverse outcomes. The principal engine for the evaluation of treatment efficacy is the randomized controlled trial (RCT). Due to the cost and other considerations, RCTs cannot address all clinically important decisions. Observational research often is used to address issues not addressed or not addressable by RCTs. This article provides an overview of the benefits and limitations of observational research to serve as a guide to the interpretation of this category of research designs in diabetes investigations. The potential for bias is higher in observational research but there are design and analysis features that can address these concerns although not completely eliminate them. Pharmacoepidemiologic research may provide important information regarding relative safety and effectiveness of diabetes pharmaceuticals. Such research must effectively address the important issue of confounding by indication in order to produce clinically meaningful results. Other methods such as instrumental variable analysis are being employed to enable stronger causal inference but these methods also require fulfillment of several key assumptions that may or may not be realistic. Nearly all clinical decisions involve probabilistic reasoning and confronting uncertainly, so a realistic goal for observational research may not be the high standard set by RCTs but instead the level of certainty needed to influence a diagnostic or treatment decision.