How Flexible is that Functional Form? Quantifying the Restrictiveness of Theories

44 Pages Posted: 8 Jul 2020 Last revised: 20 Jul 2020

See all articles by Drew Fudenberg

Drew Fudenberg

Massachusetts Institute of Technology (MIT)

Wayne Yuan Gao

University of Pennsylvania - Department of Economics

Annie Liang

University of Pennsylvania - Department of Economics

Date Written: July 17, 2020

Abstract

We propose a new way to quantify the restrictiveness of an economic model, based on how well the model fits simulated, hypothetical data sets. The data sets are drawn at random from a distribution that satisfies some application-dependent content restrictions (such as that people prefer more money to less). Models that can fit almost all hypothetical data well are not restrictive.
To illustrate our approach, we evaluate the restrictiveness of two widely-used behavioral models, Cumulative Prospect Theory and the Poisson Cognitive Hierarchy Model, and explain how restrictiveness reveals new insights about them.

Keywords: model flexibility, experimental economics, behavioral economics

JEL Classification: C90, D90, C52

Suggested Citation

Fudenberg, Drew and Gao, Wayne and Liang, Annie, How Flexible is that Functional Form? Quantifying the Restrictiveness of Theories (July 17, 2020). Available at SSRN: https://ssrn.com/abstract=3580408 or http://dx.doi.org/10.2139/ssrn.3580408

Drew Fudenberg

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Wayne Gao (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

HOME PAGE: http://www.waynegao.com

Annie Liang

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
20
Abstract Views
129
PlumX Metrics