Why Economic Models are Always Wrong
scientificamerican.com
Why Economic Models are Always Wrong
1–10 of 61 posts
Re: Why Economic Models are Always Wrong
#2I think that with economic models used for trading there is also another big problem: Their application changes the model itself. So, even if you had a perfect model for the market without you applying your model, as soon as you start applying it, the market changes... and this is also true for all the other quants who do the same with their models.
IMHO, it was much better when most stock market decisions were mostly based on "fundamentals". Because that way the market was incentivising sound business decisions.
Re: Why Economic Models are Always Wrong
#3Can you really compare Economic models to Physics models without discussing the simplifications necessary to create an Economic model?
Re: Why Economic Models are Always Wrong
#4Can you really compare Economic models to Physics models without discussing the simplifications necessary to create an Economic model?
You usually have to make a large number of simplifications to create a Physics model too. The question is how those simplifications change the accuracy of the model.
"Essentially, all models are wrong, but some are useful" -George E.P. Box
Re: Why Economic Models are Always Wrong
#5I think that with economic models used for trading there is also another big problem: Their application changes the model itself. So, even if you had a perfect model for the market without you applying your model, as soon as you start applying it, the market changes... and this is also true for all the other quants who do the same with their models. IMHO, it was much better when most stock market decisions were mostl…
'it was much better when most stock market decisions were mostly based on "fundamentals"'
I don't recall such a period. Is there a particular interval you're thinking of?
Re: Why Economic Models are Always Wrong
#6This article is more about how multiple sets of parameters can fit the same data equally well. This is why economists draw a distinction between calibration and estimation. If a parameter is "identified" in some estimation procedure, they mean they have an experiment or quasi-experiment that gives them a credible CI for the true parameter.
Re: Why Economic Models are Always Wrong
#7Is this really surprising? I would have thought this would be self-evident as these kinds of models would seem to be highly chaotic.
It's really no different than the meteorology simulations in the 60's that first discovered the butterfly effect.
http://en.wikipedia.org/wiki/Butterfly_effect#Origin_of_the_...
Re: Why Economic Models are Always Wrong
#8I think that with economic models used for trading there is also another big problem: Their application changes the model itself. So, even if you had a perfect model for the market without you applying your model, as soon as you start applying it, the market changes... and this is also true for all the other quants who do the same with their models. IMHO, it was much better when most stock market decisions were mostl…
'it was much better when most stock market decisions were mostly based on "fundamentals"' I don't recall such a period. Is there a particular interval you're thinking of?
I've thought there was more opportunity in fundamentals up until Warren Buffet and Ben Graham's the intelligent investor became well known. More people tried to use these methods, thereby increasing demand and decreasing the upside on securities that meet Graham and Buffets criteria. The stock market today is very different from when they got going, although long term I don't know that anything has fundamentally changed, even before robot traders there had always been random and unexplainable noise.
Re: Why Economic Models are Always Wrong
#9Earlier quoted context omitted.
'it was much better when most stock market decisions were mostly based on "fundamentals"' I don't recall such a period. Is there a particular interval you're thinking of?
I've thought there was more opportunity in fundamentals up until Warren Buffet and Ben Graham's the intelligent investor became well known. More people tried to use these methods, thereby increasing demand and decreasing the upside on securities that meet Graham and Buffets criteria. The stock market today is very different from when they got going, although long term I don't know that anything has fundamentally chan…
Wait, if there was more "opportunity in fundamentals" back then it would mean that stocks were further away from their fundamentals, right? That's pretty much the opposite of what the OP is complaining about.
Re: Why Economic Models are Always Wrong
#10This is known to anyone who's ever monkeyed with any type of machine learning: genetic algorithms, Bayesian filters, anything.
I agree with many of the commenters in this article. This should be common knowledge.
I also, like many commenters, couldn't help but think of model-based climate predictions.