Every Economic Model Is Wrong... But That Doesn't Mean They're Not Useful
from the hating-on-economists dept
Fred Wilson has a thought-provoking post on his blog, asking what if the economic model you're basing business decisions on is wrong? He's building off of an Umair Haque blog post, asking whether or not economists matter any more, because the models they use are wrong. I think there's some truth to both of these pieces -- and I know both Fred and Umair, and enjoy exchanging ideas with both -- but it feels like they're throwing a pretty big baby out with the bathwater.I don't think it's that the "old models" don't work any more. The problem is simply that they're models, not crystal balls. Every model has faults (that's why it's a model, rather than the real thing). What makes economics so difficult is that any real scenario involves too many variables to accurately model. Each modeling attempt tries to account for the most important of those variables, and assumes the impact of the rest washes out. However, changes in the world may impact one variable a lot more than expected, or change the relationship between variables -- and that's what throws a model out of whack. Every economic model is wrong because it simply cannot account for every human variable out there.
But, that doesn't mean you ignore what the models tell you. You can still learn quite a lot from those models -- including why they're wrong, and how to improve on them. So, for example, when Haque discusses Starbucks and Microsoft, as if basic economic models failed them, I disagree. I just think they didn't put enough weight into some important variables in their models. Starbucks, for example, failed to recognize the importance of "culture" in its equation, but that doesn't mean the whole equation was wrong.
It's certainly tempting to throw out the old models when they're proven incorrect, but that makes you lose a real learning opportunity. You should start from the position that all models are incorrect from the beginning -- and as each model is proven incorrect, figure out why so you can correct and improve, rather than simply tossing the whole thing out.
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Filed Under: economic models, economics, economists
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On economic models, IP and "thievery"
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Economies are Chaotic
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The biggest problem
Unfortunately, greed tends toward a maximum and human greed has shown no upper bound. So, trying to model a variable with no upper bound breaks any model that requires access to finite resources.
Throwing away the model doesn't help, but relying on it past the point where it's wrong is the failing of most corps and governments.
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The major flaw in Economics
Socialism and capitalism face the same issues. Both look outstanding on paper, but neither works well in a pure state.
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"Starbucks, for example, failed to recognize the importance of "culture" in its equation..."
I don't disagree with you, I just don't understand what you mean. How so? Whenever I walk into a Starbucks I see nothing but "culture", or attempts at making whatever they consider culture fit into their retail strategy. Was it the wrong "culture"? I kind of thought Starbucks was losing becuase they were charging way too much for their coffee in a down economy. Just trying to understand the example.
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Re:
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Re: Re:
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Money
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johnpolack
foreclosed homes
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commit
I have witnessed and been a part of success in less facvorable conditions than some of the represented economic models simply due to the fact I had a committed group around me willing to do their individual part.
It does take that type of effort to manage whatever model you chose, we can control that.
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comment
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