All models by necessity distort reality in one way or another. A sculptor, when modelling in stone or clay, does not try to clone Nature; he highlights some things, ignores others, idealizes or abstracts some more, to achieve an effect. Likewise a scientist must necessarily pick and choose among various aspects of reality to incorporate into a model. An economist makes assumptions about how markets work, how businesses operate, how people make financial decisions. Any one of these assumptions, considered alone, is absurd. There is a rich vein of jokes about economists and their assumptions. Take the old one about the engineer, the physicist, and the economist. They find themselves shipwrecked on a desert island with nothing to eat but a can of beans. How to get at them? The engineer proposes breaking the can open with a rock. The physicist suggests heating the can in the sun, until it bursts. The economist’s approach: “First, assume we have a can opener. . . .” The assumptions of orthodox financial theory are at least as absurd, if viewed in isolation. Consider a few: 1) Assumption: People are rational and aim only to get rich. . . . . 2) Assumption: All investors are alike. . . . . 3) Assumption: Price change is practically continuous. . . . . 4) Assumption: Price changes follow a Brownian motion. Benoit B.
Topics:
Edward Fullbrook considers the following as important: Uncategorized
This could be interesting, too:
John Quiggin writes Dispensing with the US-centric financial system
John Quiggin writes How to dispense with Trump’s US
John Quiggin writes Trump has thrown out the global economic playbook. It’s time for Australia to write its own rules
tom writes Germany’s election & why it is important to understand the Ukraine War
All models by necessity distort reality in one way or another. A sculptor, when modelling in stone or clay, does not try to clone Nature; he highlights some things, ignores others, idealizes or abstracts some more, to achieve an effect. Likewise a scientist must necessarily pick and choose among various aspects of reality to incorporate into a model. An economist makes assumptions about how markets work, how businesses operate, how people make financial decisions. Any one of these assumptions, considered alone, is absurd. There is a rich vein of jokes about economists and their assumptions. Take the old one about the engineer, the physicist, and the economist. They find themselves shipwrecked on a desert island with nothing to eat but a can of beans. How to get at them? The engineer proposes breaking the can open with a rock. The physicist suggests heating the can in the sun, until it bursts. The economist’s approach: “First, assume we have a can opener. . . .”
The assumptions of orthodox financial theory are at least as absurd, if viewed in isolation. Consider a few:
1) Assumption: People are rational and aim only to get rich. . . . .
2) Assumption: All investors are alike. . . . .
3) Assumption: Price change is practically continuous. . . . .
4) Assumption: Price changes follow a Brownian motion.