To establish the correctness of some software w.r.t. its formal specif
ication is widely recognized as a difficult task. A first simplificati
on is obtained when the semantics of an algebraic specification is def
ined as the class of all algebras which correspond to the correct real
izations of the specification, A software is then declared correct if
some algebra of this class corresponds to it. We approach this goal by
defining an observational satisfaction relation which is less restric
tive than the usual satisfaction relation. Based on this notion we pro
vide an institution for observational specifications. The idea is that
the validity of an equational axiom should depend on an observational
equality, instead of the usual equality. We show that it is not reaso
nable to expect an observational equality to be a congruence. We defin
e an observational algebra as an algebra equipped with an observationa
l equality which is an equivalence relation but not necessarily a cong
ruence. We assume that two values can be declared indistinguishable wh
en it is impossible to establish they are different using some availab
le observations. This is what we call the Indistinguishability Assumpt
ion. Since term observation seems sufficient for data type specificati
ons, we define an indistinguishability relation on the carriers of an
algebra w.r.t. the observation of an arbitrary set of terms. From a ca
reful case study it follows that this requires to take into account th
e continuations of suspended evaluations of observation terms. Since o
ur indistinguishability relation is not transitive, it is only an inte
rmediate step to define an observational equality. Our approach is mot
ivated by several examples.