Sunday, September 6, 2015

Noah Smith — "The Case For Mindless Economics", 10 years on


This is a mindless argument. There is no rule about choosing assumption for modeling other than the usefulness of the model. A model might a heuristic or a thought experiment not designed or represented as realistic. However, models that are offered as being realistic face the test of evidence.

The best explanation is the one that satisfies the traditional four criteria — consistency, correspondence, simplicity, and usefulness — more fully than others.

Often there is not a best explanation in that meets all criteria, but any model that claims to be representational of reality must pass the correspondence test in terms of evidence in terms of what speaks for it and what speaks against it.

At the same time, it is possible that the currently best explanation, even though it is not terribly representation of reality, might be the best explanation available given the criteria, that it, it is consistent and relatively simple. It may be that it's just not very useful to rely on predictively.

Anyway, Noah sets forth the issues.

However, if a highly predictable model were ever generated in finance, that would be the end of a lot of financial transaction unless fools were taking the other side of the trade.

Noahpinion
"The Case For Mindless Economics", 10 years on
Noah Smith | Assistant Professor of Finance, Stony Brook University

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