Interesting thoughts from Kaiser Fung.
Derman seems to have a point in his criticisms of economic models—and things are just as bad in other social sciences. (I’ve criticized economists and political scientists for taking a crude, 80-year-old model of psychology as “foundational,” but even more sophisticated models in psychology and sociology have a lot of holes, if you go outside of certain clearly bounded areas such as psychometrics.)
What can be done, then? One approach, which appeals to me as a statistician, is to more carefully define one’s range of inquiry. Even if we don’t have a great model of political bargaining, we can still use ideal-point models to capture a lot of the variation in legislative voting. And, in my blog post linked to above, I recommended that economists forget about coming up with the grand unified theory of human behavior (pretty impossible, given that they still don’t want to let go of much of their folk-psychology models) and put more effort into their central competence of analyzing prices, capital flows, and so forth.
At the same time, governments, businesses, and other organizations need to make decisions involving macroeconomics. So we can’t just give up. And, in my own applied statistical work, I use imperfect models all the time.
Here’s what Kaiser writes:
The insurmountable challenge of social science models, which constrains their effectiveness, is that the real drivers of human behavior are not measurable. What causes people to purchase goods, or vote for a particular candidate, or become obese, or trade stocks is some combination of desire, impulse, guilt, greed, gullibility, inattention, curiosity, etc. We can’t measure any of those quantities accurately.
What modelers can measure are things like age, income, education, past purchases, objects owned, etc. Nowadays, we can log every keystroke you type on your smartphone. That models are even half-accurate is due to the correlation of these measured quantities with the hidden drivers of our behavior but this correlation is only partial.
Now add to that, the vagaries of human behavior.