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It's even stronger than that: the model you derive by assuming a room full of perfectly rational agents may well be accurate, even though in reality the agents
by improbable22 8y ago
It's even stronger than that: the model you derive by assuming a room full of perfectly rational agents may well be accurate, even though in reality the agents are not rational. Or at least, it may do an excellent job of describing the aggregate behaviour, even if it does terribly at describing individual's behaviour.
Physics does this all the time, too. You can, indeed must, be wrong about all the microscopic details... but despite that, you can often get the correct macroscopic model.
- soVeryTired 8y agoThis is something like Milton Friedman's 'pool player analogy'. It doesn't matter if a pool player isn't calculating all the angles and frictions when he pots a ball, because it's as if he was. So as long as your model has predictive power, unrealistic assumptions don't matter. The unfortunate part is that most models in economics have lousy predictive power.
- makomk 8y agoThe fundamental problem with this is that the economy is made up of intelligent people who can actively find ways to exploit flaws in the model, and that - because the model's assumptions make it hard to become filthy rich - they have a direct financial incentive to do so. So, in practice, the interesting parts of the economic system all rely heavily on breaking those nice elegant assumptions.