Sunday, December 2, 2007

Economists and their models and why they tend to be skeptics

In Robert Rubins' In An Uncertain World:
The now famous Black-Scholes formula was my first experience with the application of mathematical models to trading, and I formed both an appreciation for and a skepticism about models that I have to this day. ... reality is more complex than models. Models necessarily make assumptions. ... But a trader could easily lose sight of the limitations. Entranced by the model, a trader could easily forget that assumptions are involved and treat it as definitive. (p. 80)

I can see how users of models can be misled by their elegance and in particular their ability to deliver "an answer". However, I believe that economists tend to be skeptical about models (even their own models) because they know the underlying assumptions (or are aware of assumptions) made to simplify reality. In part, I think that this is why they initially tended to be skeptical about climate models and the predictions on climate change. This attitude is changing now with the overwhemning evidence that climate change is real. I think though that where there is a divide now is in mitigating climate change -- the go-slow approach versus the do-all-we-can now. This also reflects the uncertainties about the possibility of gradual climate change versus abrupt climate change.

No comments: