Chameleons: The Misuse of Theoretical Models in Finance and Economics

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 being “standard in the literature,” and the need for tractability.

Keywords: theoretical models, model assumptions, positive economics, Friedman, as-if arguments, false arguments

JEL Classification: D00, E00, G00, H00