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

Perry writes:
>> In virtually every field I'm familiar with, experts use simplified models
>> to illustrate basic points both to novices, and to each other. ...
>True enough.
>However, most of the time these simplifications are pretty minor.
>... a closer model differs ... by only a few parts in a thousand ...

Most simplified models differ from more complex ones by *far* more than
one part in a thousand! Any engineer here can attest to that.

>Permit me to state what I feel is an underlying problem here.
>Mathematical models of large scale human behavior can produce
>interesting "large picture" result -- ...
>However, there is a temptation to do more than this. ...
>I am highly skeptical of any sort of mathematical economics that
>pretends to be able to make overly precise predictions.

I thought I *was* trying to describe a large picture result.
What do you find to be overly precise about my claim?

>> 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?
>
>I find the statement generally plausible in a rough sort of way. Of
>course, the mechanisms you are postulating that would generate the
>stated result are rather bizarre and resemble real venture capitalists
>only in that they are far more complex and resemble the real thing in
>almost no particulars. Furthermore, you're using a lot of great
>ambiguous terms there.
>
>What is a "competitive rate of return"? How does one measure this
>rate?

I am invoking the idea that possible investment projects must compete with
each other for funding, and that a major criteria investors use in comparing
them is the rate of return they expect to get. I don't see why this
is a "bizarre" mechanism, nor the relevance of asking how return should
best be measured.

>Why would we really expect the result to be radically different
>if people have property rights in their investment?

If you found it plausible that investments become more and more
attractive with time (over some range), by offering higher and higher
returns, then you should find it plausible that the returns would be
higher if investments were postponed due to property rights. That was
my main point; I didn't claim any "radical difference".

Is this discussion helping to clarify things for anyone else but Perry?
If not, let's end it.

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 21:07:55 1998