5 ms·
> A simplified model is better than no model at all. This is true in physics where the system being modelled is governed by stable laws. You can confirm the mo
by Firadeoclus 9y ago
> A simplified model is better than no model at all.
This is true in physics where the system being modelled is governed by stable laws. You can confirm the model's predictive usefulness by experiment. If you test the model and find its limitations, you expect them to hold in 50 years' time.
Economic models, however, are themselves part of the economy. The ideas they are built on and their predictions become part of wider knowledge and influence the very thing the model is trying to predict or explain, possibly reinforcing or weakening certain behaviours. If a simplified model becomes widespread it can lead to blind spots in our understanding which cause systemic issues.
Of course that doesn't mean the model was bad or unsuitable for its original intent. But a simplified model can, in the wrong hands, be a net negative.
- vertere 9y ago> Economic models, however, are themselves part of the economy. The ideas they are built on and their predictions become part of wider knowledge and influence the very thing the model is trying to predict or explain, possibly reinforcing or weakening certain behaviours. Which is the very problem "rational expectations" modeling [0] is trying to avoid. Rational expectations models don't 'know' anything (systematic) that the actors in it don't. [0] https://en.wikipedia.org/wiki/Rational_expectations https://en.wikipedia.org/wiki/Rational_expectations
- bllguo 9y agoThat is an interesting point, that people have bought too much into this simplified model s.t. reality bends towards the model. I don't know if I blame the model for that - like you say in your last sentence. But what's the alternative besides starting with simplifications and iterating?