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All models are wrong by definition. The purpose of a model is to be a simplification of reality in order to gain insights and not to perfectly replicate reality

• ianleeclark 7y ago
  > All models are wrong by definition. I would agree. > Just because a model is simple doesn't mean that it is bad or worse than a model with more complex assumptions. I'm not condemning it being simple. If we were just talking about small or exceptional exclusions to the rules like Giffen or Veblen goods, then I wouldn't have made the above post. We're talking about fundamentally incorrect building blocks that aren't even acknowledged in the literature.
• morningseagulls 7y ago
  >In physics, there is even the metaphor of the spherical cow[1] to make fun of the need to simplify things in order to understand them. It's a joke to remind us of a sobering fact: that unreal assumptions lead to unreal results. >Just because a model is simple doesn't mean that it is bad or worse than a model with more complex assumptions. But if a model with more complex assumptions is a better approximation to reality than a model with simpler assumptions, would you not adopt the former? What has happened in economics is that people have clung on to, say, Newtonian mechanics, instead of embracing Einstein's relativity. Even this does not quite adequately express the enormity of the inertia that you see in economics, because at least Newtonian mechanics is right most of the time, whereas neoclassical economics is wrong most of the time. The SMD theorem guarantees, for example, that most market demand curves will NEVER satisfy the fundamental neoclassical "law" of demand. Let me also point out that your comment is rehashing Friedman's positivism.[0] Even in quantum mechanics, which has for decades been dominated by the positivism of the Copenhagen interpretation, people are now transcending that positivism because they've come to the realisation that quantum mechanics can't be advanced without overcoming the crutch of positivism. And Friedman's assertions about assumptions are unsound anyway.[1] [0] https://en.wikipedia.org/wiki/Essays_in_Positive_Economics https://en.wikipedia.org/wiki/Essays_in_Positive_Economics [1] For a critique of Friedman's argument about assumptions in models, see https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-6435.1981.tb01195.x https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-6435....
  • taffer 7y ago
    > But if a model with more complex assumptions is a better approximation to reality than a model with simpler assumptions, would you not adopt the former? Not necessarily. Maybe the simpler model is enough to understand what is going on. Maybe a more complex model suffers from over-fitting and performs worse than the simpler model. It really depends. > The SMD theorem guarantees, for example, that most market demand curves will NEVER satisfy the fundamental neoclassical "law" of demand. Does it really say that? Or simply that weird market demand curves are possible in a few exceptional situations?
    • morningseagulls 7y ago
      >Maybe the simpler model is enough to understand what is going on. Maybe a more complex model suffers from over-fitting and performs worse than the simpler model. It really depends. If only physics departments everywhere would adopt this philosophy! Physics undergrads would then be liberated from the yoke of Einstein's relativity, let alone the tyranny of the mind-blowing quantum field theory with its insufferably complicated Feynman diagrams. It does not depend. The simpler model in economics is fatally flawed, and is the one suffering from over-fitting (to a straight line, no less) and contributing to the bad reputation of economics as a "dismal science". >> The SMD theorem guarantees, for example, that most market demand curves will NEVER satisfy the fundamental neoclassical "law" of demand. >Does it really say that? Or simply that weird market demand curves are possible in a few exceptional situations? Yes, it does.[0] The exceptional situations are precisely those that neoclassical economics assumes are the norm, namely, that there is only one agent and one commodity in the market.[1] As soon as you have more than one agent/consumer in an economy, the mathematics will undermine the "law" of demand, because the inter-agent interactions would generate non-linear terms in the market demand function. And once you have terms of higher order, the demand curve generated by that function will have sections that slope upwards, exactly what is being forbidden by the "law" of demand. And we haven't yet taken into account the very real fact that multiple consumers cannot possibly have the same preferences. Or that these preferences can change with different levels of income.[2] In short, neoclassical microeconomics only works in a communist economy of identical clones with identical preferences and incomes. Oh, the irony. [0] https://en.wikipedia.org/wiki/Sonnenschein%E2%80%93Mantel%E2%80%93Debreu_theorem https://en.wikipedia.org/wiki/Sonnenschein%E2%80%93Mantel%E2... [1] https://en.wikipedia.org/wiki/Representative_agent https://en.wikipedia.org/wiki/Representative_agent [2] https://en.wikipedia.org/wiki/Homothetic_preferences https://en.wikipedia.org/wiki/Homothetic_preferences