Implausible assumptions

Antonio Fatas has some interesting things to say about the reliance of economic models on implausible assumptions.

All models rely on assumptions and economic models are known (and made fun of) for relying on very strong assumptions about rationality, perfect information,… Many of these assumptions are unrealistic but they are justified as a way to set a benchmark model around which one is then allowed to model deviations from the assumptions.

The problem is, he says, that an unrealistically high standard of proof is set for departing from the benchmark. Essentially, it’s OK to use the benchmark model, which we all know is just plain wrong, but you need really strong evidence in order to support the use of other assumptions, even though they just might be right.

I suspect the problem is that it’s easy to differentiate the benchmark assumptions: they’re the ones that we wish were true, in a way, because they’ve got nice properties. All the other assumptions, that might actually be true, are messy, and why choose one set over another?

 

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