poly: On Simple Models (Was: Why interest rates may stay low)

From: Robin Hanson <hanson@econ.berkeley.edu>
Date: Tue Mar 03 1998 - 10:22:38 PST

Perry responds to my attempt at clarification:
>> assume that ... investors ... decided that that
>> average rate of return for this project depended
>> on when the project started according to the following table:
>I don't know any actual investors who delude themselves this way. No
>one can reasonably predict future rates of return that far into the
>future, and indeed, no one even tries. ...
>(Yes, I know you are just doing an "academic exercise" and we are
>should stay quiet and simply make the assumptions
>"for purposes of illustration" so that we can get an isolated point
>I just have some trouble with the notion that once you've made enough
>assumptions that what comes out the other end is interesting in a
>predictive sense and doesn't just become an interesting math problem
>arbitrarily selected from the space of all math problems.)

In virtually every field I'm familiar with, experts use simplified models
to illustrate basic points both to novices, and to each other. If experts
have done their job right, these basic points should continue to hold in
more complex models, but the complexity gets in the way of illustration.

Of course if you fear that these experts have failed at their job, and so
these results aren't robust to making the models more realistic, you may
not be convinced. You may even ask the expert to show how her result is
robust to some particular simplifying assumption. But how much effort
they'll put into a response depends on your relationship with that expert.

If you are another expert in the same field, such as a reviewer at a
journal, the expert may put in a substantial effort. If, however, you are
a novice with only a weak relationship, who indiscriminantely asks for
such analysis regarding every model assumption she can identify, and who
doesn't seem willing to grant the expert credibility (the benefit of
the doubt) after some limited number of initial challenges, the expert may
put in little or no effort into a response.

Perry, I don't see any indication that you are discriminating in your
choice of assumptions to challenge, nor that it is possible to
develop credibility with you. Nor even that you understand and disagree
with my basic point. And you are not paying me to teach you this field.

My main point was just this: when there are not property rights in some
investment, and the investment becomes more and more attractive as time
goes on, the investment will happen near the time when it first seems to
offer at least a "competitive" return, even if that investment would
offer an even higher return if everyone waited. Do you really find
this point implausible, and if so can you identify the *one* complexity
you most want to see if my simplifed model is robust regarding?

Robin Hanson
hanson@econ.berkeley.edu http://hanson.berkeley.edu/
RWJF Health Policy Scholar, Sch. of Public Health 510-643-1884
140 Warren Hall, UC Berkeley, CA 94720-7360 FAX: 510-643-8614
Received on Tue Mar 3 18:26:49 1998

This archive was generated by hypermail 2.1.8 : Tue Mar 07 2006 - 14:45:30 PST