Cherry-picking economic models

26 Jul, 2021 at 10:49 | Posted in Economics | 8 Comments

cartoon-hand-picking-cherry-24380737How would you react if a renowned physicist, say, ​Richard Feynman, was telling you that sometimes force is proportional to acceleration and at other times it is proportional to acceleration squared?

I guess you would be unimpressed. But actually, what most mainstream economists do amounts to the same strange thing when it comes to theory development and model modification.

In Dani Rodrik’s Economics Rules — just to take one illustrative example — the proliferation of economic models during the last twenty-thirty years is presented as a sign of great diversity and abundance of new ideas:

Rather than a single, specific model, economics encompasses a collection of models … Economics is in fact, a collection of diverse models …The possibilities of social life are too diverse to be squeezed into unique frameworks. But each economic model is like a partial map that illuminates a fragment of the terrain …

Different contexts … require different models … The correct answer to almost any question in economics is: It depends. Different models, each equally respectable, provide different answers.

In mainstream economic theory,​ preferences are standardly expressed in the form of a utility function. But although the expected utility theory has been known for a long time to be both theoretically and descriptively inadequate, mainstream economists all over the world gladly continue to use it, as though its deficiencies were unknown or unheard of.

What most mainstream economists try to do in face of the obvious theoretical and behavioural inadequacies of the expected utility theory, is to marginally mend it. But that cannot be the right attitude when facing scientific anomalies. When models are plainly wrong, you’d better replace them! Instead of mending the broken pieces it would be much better to concentrate on developing descriptively accurate models of choice under uncertainty.

Expected utility theory is seriously flawed since it does not take into consideration the basic fact that people’s choices are influenced by changes in their wealth. Where standard microeconomic theory assumes that preferences are stable over time, behavioural economists have forcefully again and again shown that preferences are not fixed, but vary with different reference points. How can a theory that doesn’t allow for people having different reference points from which they consider their options have a (typically unquestioned) axiomatic status within economic theory?

Much of what experimental and behavioural economics come up with, is really bad news for mainstream economic theory. It unequivocally shows that expected utility theory is nothing but transmogrifying truth.

But mainstream economists do not see this​ since they have the weird idea that economics is nothing but a smorgasbord of ‘thought experimental’ models. For every purpose you may have, there is always an appropriate model to pick.

ChameleonBut, really, there have​ to be some limits to the flexibility of a theory!

If you freely can substitute any part of the core and auxiliary sets of assumptions and still consider that you deal with the same theory, well, then it’s not a theory, but a chameleon.

The big problem with the mainstream cherry-picking view of models is of course that the theories and models presented get totally immunized against all critique.  A sure way to get rid of all kinds of ‘anomalies,’ yes, but at a far too high price. So people do not behave optimizing? No problem, we have models that assume satisficing! So people do not maximize expected utility? No problem, we have models that assume … etc., etc …

A theory that accommodates for any observed phenomena whatsoever by creating a new special model for the occasion, and a fortiori having no chance of being tested severely and found wanting, is of little real value.


  1. “But mainstream economists do not see this​ since they have the weird idea that economics is nothing but a smorgasbord of ‘thought experimental’ models. For every purpose you may have, there is always an appropriate model to pick.”

    It’s bizarre. It’s a comedy. It’s a tragedy. And it’s no wonder the world’s in trouble.

  2. 》How would you react if a renowned physicist, say, ​Richard Feynman, was telling you that sometimes force is proportional to acceleration and at other times it is proportional to acceleration squared?
    Don’t physicists tell us that stars orbit faster than gravity equations predict, due to invisible spooky undetectable ether-like dark matter? So physics is no better than economics?

    • An economist measuring anything well enough to detect a deviation from the “prediction” of an operationalized theory would be an extraordinary development.

      But, as the OP suggests, finding that a theoretical model is wrong is inconsequential and that is a serious problem indeed. All models on that smorgasbord are wrong and no one cares to discard any.

      • Are all the models that respectable people talk about selected by political economy? Other models of gravity and acceleration are devalued through ad hominem, authority, respect for tradition, and other arbitrary psychological things?
        Isn’t the proper object of Lars’s critical realism really psychological things? Whether a number gets recorded or thrown out is ultimately due to a story in the measurer’s (or tool designer’s) head?

        • Not a story exactly. A story is a meaningful narrative, but when a scientist goes from a theory, which may have its motivation in a favored storyline, to measurement, the scientist (or the scientist’s technical assistant) must “operationalize” the theory into a mechanism and in that process the story, its meaning and plot fall away, replaced by the interactions of system. Thought moves from the frontal lobe to the cerebellum. And that makes a critical difference. Measurement is ideally objective, detached from idiosyncratic perspective. Realism takes its inspiration from the mindset that measures in way that is reproducible, repeatable by others, immune to mood and selfish values.

        • There is the still delightful (to me at least) story of Viner’s error. Jacob Viner, a graduate of McGill and Harvard, was a famous economist at Chicago in the 1920s and 1930s.

          For a paper he was preparing for publication, he asked a draftsman to make an illustration of how short-run economies of scale relate to long-run economies scale. The story he wished to tell was of a large, graceful, shallow curve representing economies of scale when capital invested in fixed plant and dedicated equipment could be freely varied, enveloping smaller, steeper curves representing economies of scale in the short-run, when capital is fixed and invariable and only labor inputs can vary with output rates.
          Viner instructed his draftsman to draw the long-run curve enveloping the short-run curves, and with long-run curve intersecting the short-run curves at the lowest short-run cost.
          The draftsman refused. Viner grew angry. The draftsman remained adamant.
          This illustrates how science in the process of operationalizing a theory kills a story.
          Viner had a story in his head that said short-run lowest cost associated with fixed capital coincided with a point on the curve representing long-run lowest cost for that rate of output.
          T’aint so, the draftsman knew, not because of his knowledge of economics per se, but because he knew plane geometry. He knew that the large curve — lowest long-run cost for a given rate of output —would envelop the smaller curves at a point tangent that could not possibly be the lowest short-run cost for a given rate of output.
          Viner was wrong and the draftsman was right, and this was discovered in trying to operationalize the story into the mechanism of an enveloping curve.
          The economic intuition is altered: an airline optimizing the size of plane for a scheduled route with a certain traffic will choose to run a plane with empty seats. Not the story we want to tell instinctively perhaps but the implication when you operationalize the mechanism.

        • Bruce, when you operationalize an airline, can’t you tell an entirely different story dominated by finance? Wasn’t the draftsman simply telling a story of plane geometry, but phone calls between financiers easily overwrite any economic story?
          If you look at,%20Balance%20Sheet%20&%20Cash%20Flow/Individual%20Carriers%20SEC%20Data/Southwest%20Airlines%20Co.htm for example, why does interest rate expense decrease as borrowing increases? Is ~$2 billion in “other” revenue as or more significant than fixed costs?
          And can I bet they use derivatives to hedge fuel expense volatility, but simply change accounting conventions as needed to hide the additional revenue? Would we ever see their real books to be able to tell?
          Tl;dr: are fundamentals, as a trader joke goes, just whatever does not move price? Stories move price and operationalization is just another story-telling process?

Sorry, the comment form is closed at this time.

Blog at
Entries and Comments feeds.