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Chameleons: The Misuse of Theoretical Models in Finance and Economics

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  • Pfleiderer, Paul

    (Stanford University)

Abstract

In this essay I discuss how theoretical models in finance and economics are used in ways that make them “chameleons†and how chameleons devalue the intellectual currency and muddy policy debates. A model becomes a chameleon when it is built on assumptions with dubious connections to the real world but nevertheless has conclusions that are uncritically (or not critically enough) applied to understanding our economy. I discuss how chameleons are created and nurtured by the mistaken notion that one should not judge a model by its assumptions, by the unfounded argument that models should have equal standing until definitive empirical tests are conducted, and by misplaced appeals to “as-if†arguments, mathematical elegance, subtlety, references to assumptions being “standard in the literature,†and the need for tractability.

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  • Pfleiderer, Paul, 2018. "Chameleons: The Misuse of Theoretical Models in Finance and Economics," Research Papers 3020, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3020
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    Cited by:

    1. Yew-Kwang Ng, 2016. "Are Unrealistic Assumptions/Simplifications Acceptable? Some Methodological Issues in Economics," Pacific Economic Review, Wiley Blackwell, vol. 21(2), pages 180-201, May.
    2. Falkinger, Josef, 2016. "The order of knowledge and robust action: How to deal with economic uncertainty?," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 10, pages 1-30.
    3. Jacky Mallett, 2015. "Threadneedle: An Experimental Tool for the Simulation and Analysis of Fractional Reserve Banking Systems," Papers 1502.06163, arXiv.org.
    4. Leonardo Ivarola, 2021. "Economic Models, Realism And Similarity," Documentos de trabajo del Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET) 2021-63, Universidad de Buenos Aires, Facultad de Ciencias Económicas, Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET).
    5. Weidong Tian & Junya Jiang & Weidong Tian, 2017. "Model Uncertainty Effect on Asset Prices," International Review of Finance, International Review of Finance Ltd., vol. 17(2), pages 205-233, June.

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