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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.

Suggested Citation

  • 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. Jacky Mallett, 2015. "Threadneedle: An Experimental Tool for the Simulation and Analysis of Fractional Reserve Banking Systems," Papers 1502.06163, arXiv.org.
    3. 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.
    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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