10 thoughts on “Economic Models”

  1. No surprise here. The entire basis of Complexity Economics is that economic systems are too complex to reliably model because they are subjected to easy disruption by minor variables and feedback loops. Unfortunately the generation of physicists that decided to go into Wall Street to get rich didn’t understand this and believed economic systems would be easy for them to model and game for profit.

    This book, “The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It” tells the whole sad story.

    http://www.amazon.com/Quants-Whizzes-Conquered-Street-Destroyed/dp/0307453383/ref=sr_1_1?ie=UTF8&qid=1319820644&sr=8-1

    1. Unfortunately the generation of physicists that decided to go into Wall Street to get rich didn’t understand this and believed economic systems would be easy for them to model and game for profit.

      Here’s the thing. I don’t see any evidence that they were wrong. Leverage was the problem not bad models. Enough leverage and I can turn any investment, no matter how solid it originally was, into a brazen gamble.

  2. As a side note, one of the theoretical economic justifications for market regulation is to control for the minor variables and asymmetric information flows to prevent feedback loops from spiraling out of control.

    1. Rather, it looks OK in Chrome but horrible in IE. I think it’s due to the use of a font called “Georgian;” when I use IE9’s dev tools to disable that style rule, the page looks better.

  4. I’m old enough to remember hearing people say, “It comes from a computer so it must be right.”

    Any computer model is only as good as the programmers’ understanding of the system being modeled. Some things are very well understood and the models can be very accurate. Many things are extremely complex (cough: climate, economies) and poorly understood. That’s why the models aren’t accurate and why centralized planning/management works poorly if at all.

  5. Words of wisdom from Oberkampf, Trucano, and Hirsch “Verification, validation, and predictive capability in computational engineering and physics” (Appl Mech Rev vol 57, no 5, September 2004):

    In the OR field, the systems being analyzed can be extraordinarily complex, such as industrial planning models, marketing models, national and world economic models, monetary investment models, and military conflict models. For these types of situations, one must deal with statistical models where statistical calibration and parameter estimation are crucial elements in building the models. These complex models commonly involve a strong coupling of complex physical processes, human behavior, and computer controlled systems. For such complex systems and processes, fundamental conceptual issues immediately arise about how to assess the accuracy of the model and the resulting simulations. Indeed, the predictive accuracy of most of these models cannot be assessed in any meaningful way, except for predictive cases that are very near, in some sense, the calibration database.

    In aerospace, we distinguish between verification, validation, and calibration. It is absolutely essential to validate complex models with empirical data in the regime in which the model will be used. It is risky to apply a complex model outside the validation regime. However, I would dispute the blanket statement made by Carter:

    Though taken aback, he continued his study, and found that having even tiny flaws in the model or the historical data made the situation far worse. “As far as I can tell, you’d have exactly the same situation with any model that has to be calibrated,” says Carter.

    This sweeping generalization is simultaneously bold and naive. This blanket rejection of numerical methods, based on a very small sample, is unwarranted. Having said that, the valid application of complex models is necessarily painstaking. Too many model-builders are trained in the specialties they try to model but remain ignorant of computation. And the models they build should be regarded with the extreme skepticism normally reserved for carnival barkers and climatologists.

    1. You’re right, but I’ve engaged on online arguments with Warmists who insist that AGW is so important that they don’t have the time to perform any verification or validation of the climate models. We’re supposed to just accept the model outputs just because. Morons.

  6. In the one and only Econ class I took, the instructor was a Broker / Commodities Trader by day and a college prof at night working on his PhD in Economics. He told us early on that an honest economist will tell you that they can say AFTER the fact why ‘X” happened.

    Only a foolish economist will tell you BEFORE “X” happens that it will or won’t and why or why not. He said what most of the do is like weather forecasting, using last months newspapers, but ones from another continent.

    I think the the other thing that gets overlooked is the MSM touting some upswing, downturn, or whatever. I know it seemed to me that they beat the drum loud and long before the crap hit the fan for the Dot Com bust.

    I know, I know…it was coming, but could it have been less drastic and sudden if they hadn’t been beating it so hard that it’s RIGHT around the corner, what if it happens TOMORROW…blah, blah, blah. Being anti-profit the leftists love a good recession.

    Causing or helping one last longer must give the leftist, little leftist chubbys.

    1. I know it seemed to me that they beat the drum loud and long before the crap hit the fan for the Dot Com bust.

      Eh, if you say so. I found the problem more to be vastly uncritical accolades for the dotcoms. If the media were truly this negative before the bubble collapsed, then maybe the bubble wouldn’t have gone as high as it did.

      I know, I know…it was coming, but could it have been less drastic and sudden if they hadn’t been beating it so hard that it’s RIGHT around the corner, what if it happens TOMORROW…blah, blah, blah. Being anti-profit the leftists love a good recession.

      I don’t recall the mess being sudden. It started in March 2000 and was still going on when 9/11 happened.

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