Chameleons: The Misuse of Theoretical Models in Finance and Economics

Paul Pfleiderer
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Paul Pfleiderer: Stanford University

Research Papers from Stanford University, Graduate School of Business

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 that are "standard in the literature," and the need for tractability.

Date: 2014-03
New Economics Papers: this item is included in nep-his, nep-hme, nep-hpe, nep-mfd and nep-pke
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3020

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