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Michael Nute

I think the models that Derman and Rodrik are talking about are actually quite different from each other, and that they're both right in their separate assertions. Statistical models of social behavior suffer from exactly the downfall you and Derman describe, but economic models are usuallly designed as theoretical setups between actors with the goal of predicting equilibrium behavior. Then statistics and historical data are used to show that this behavior has indeed resulted. The downfall of economic models is that they are hyper-dependent on assumptions and therefore lead to conclusions that border on the tautological.

The efficient market hypothesis is the classic example. Like all economic models it refers to equilibrium behavior only, and in the presence of an infinitely large market, though these provisos tend to be omited in popular discussion. It's meant to be illustrative only, showing the incentives and profit-seeking behavior of buyers and sellers and its effects on prices. Whether this accurately describes all markets for all securities at all times here on planet Earth is another matter and is beside the point. When I hear people discuss wehther the EMH is "True" or not, my head explodes. And when students take these messages blindly into the real world without the nuances of the argument from the graduate classroom, as Rodrik describes, tragedy ensues.

The dangers of elevating these models to the level of physics though are very real, and it happens all the time. Read a finance textbook's treatment of CAPM and you'd think it was cosmic truth. I think Rodrik's analogy was more of a clumsy as-if than that kind of elevation, but the point is valid.

Luke Lea

Adjusting the wooden head phones? Here's what Richard Feynman had to say about science in general: http://www.lhup.edu/~DSIMANEK/cargocul.htm

Dean Eckles

I wonder what you think of John Sutton's more academic (but short and readable) book Marshall's Tendencies: What Can Economists Know?.

It addresses the difference between having a model that is a rough approximation and one that isn't even that.


Students can describe the world with Newtonian mechanics, not explain it.

And you forgot the requisite "assume a con-opener" joke.

ezra abrams

Why does no one ever talk about money power and status when talking about economists
After all, when we talk about what economists do, we are talking about a small group of people at harvard, mit , uchicago etc who set the tone; James Galbraith has a lot on how the elites define the subject
and being a econ prof at harvard is a good gig; good pay, power over students grads and postdocs (and power is great in a job, better then pay for most people) the chance to work for hte president (who has a council of econ advisors; since almost all of us care more about our live lives and children then about money, why doesn't the POTUS have a council of sex adivsors...)
using math is like a union card, it keeps people from competing
and you can write texts and charge students an arm and a leg

digital options

I like your post. As an economics student I agree that the economic models being taught in the classroom are too simplistic. I think I am going to buy this book, it sounds very interesting.

Audrey Lyn

Thanks a lot for interesting article!

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