Dangers of model simplifications

12 May, 2015 at 23:41 | Posted in Economics | 1 Comment

We forget – or willfully ignore – that our models are simplifications of the world …

nate silverOne of the pervasive risks that we face in the information age … is that even if the amount of knowledge in the world is increasing, the gap between what we know and what we think we know may be widening. This syndrome is often associated with very precise-seeming predictions that are not at all accurate … This is like claiming you are a good shot because your bullets always end up in about the same place — even though they are nowhere near the target …

Financial crises – and most other failures of prediction – stem from this false sense of confidence. Precise forecasts masquerade as accurate ones, and some of us get fooled and double-down our bets.

1 Comment

  1. There’s something very weird about the idea that a model is necessarily a simplification. If a model airplane is an exact replica of the real airplane, it’s not simplified, it’s just small.

    And if I model the solar system with styrofoam balls and wire, but get the elliptical orbits and axis tilts and relative size and distance all correct, it’s not really more simple than the real solar system, is it?

    You might say I simplified it by leaving out the atmosphere of the planets. But I didn’t do that to simplify my model, I did it because I am not modeling the planets, I’m modeling the solar system.

    Economists want to look at that last example and say, “No, leaving out the atmospheres is a simplification.” But is it a simplification in the same way that imagining an equilibrium of prices is a “simplification”? One simplification leaves something out that we know, with close to certainty, doesn’t effect what we’re interested in. The other simplification involves a thought experiment generating an abstract thing, an equilibrium, that does not actually exist. Whatever that is, it’s not “simplification.”

    The metaphor “don’t confuse the map for the territory” is infuriating because no one ever does confuse a road atlas of Illinois with the physical state of Illinois. But even if you did, you wouldn’t get lost because while the map is not the territory, it’s not any more simple than the territory, it’s just smaller.

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