Chameleons: The Misuse of Theoretical Models in Finance and Economics

Paul Pfleiderer

Economica, 2020, vol. 87, issue 345, 81-107

Abstract: In this paper 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, assumptions that are ‘standard in the literature’, and the need for tractability.

Date: 2020
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