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>t would be reasonable to say that CAPM is a mathematical result, and the evidence suggests the mathematical model required for CAPM simply fails to correspond
by ryanmonroe 11y ago
>t would be reasonable to say that CAPM is a mathematical result, and the evidence suggests the mathematical model required for CAPM simply fails to correspond to reality. But many finance folks, especially in academia, won't admit it.
In other words, "Things are more complicated in real markets". I don't see any problem with wanting descriptive theories. Economists are interested in building models whose parameters can be tweaked in ways that correspond in a clear meaningful way to a possible actions (e.g. change government expenditure on X by Y). If you try to just maximize predictive power you're missing the point. Economics can be used to predict the future, but I would say the main goal of the field is to produce theory that will provide valid methods of altering the future.
- p4wnc6 11y agoThis doesn't make a lot of sense in this example with CAPM. The economic theory provides something that is abjectly wrong. It is literally claiming there is a positive relationship between two quantities when the evidence suggests the relationship is negative. The theory is grossly qualitatively wrong, not merely just on the edge of being quantitatively wrong in a few cases or something.
- tormeh 11y agoSo you're saying that we need wrong theories that can guide policymakers in the right direction? That sounds like a bad idea. It's basically "I want you to do this thing. Let me invent a theory that makes me sound more persuasive. Don't worry about the details!" Yes, we need theories that are easy enough to reason about that they provide useful insight, but I don't think this is even close to being too complicated.