29 March 2014 at 5:26 am Nicolai Foss

| Nicolai Foss |

Here is a new paper by major Stanford finance scholar, Paul Pfleiderer on what he calls “chameleon models” and their misuse in finance and economics. Lots of catchy concepts, e.g., “theoretical cherry picking” and “bookshelf models,” and an fine critical discussion of Friedmanite instrumentalism. The essence of the paper is this:

Chameleons arise and are often nurtured by the following dynamic. First a bookshelf model is constructed that involves terms and elements that seem to have some relation to the real world and assumptions that are not so unrealistic that they would be dismissed out of hand. The intention of the author, let’s call him or her “Q,” in developing the model may to say something about the real world or the goal may simply be to explore the implications of making a certain set of assumptions. Once Q’s model and results

become known, references are made to it, with statements such as “Q shows that X.” This should be taken as short-hand way of saying “Q shows that under a certain set of assumptions it follows (deductively) that X,” but some people start taking X as a plausible statement about the real world. If someone skeptical about X challenges the assumptions made by Q, some will say that a model shouldn’t be judged by the realism of its assumptions, since all models have assumptions that are unrealistic. Another rejoinder made by those supporting X as something plausibly applying to the real world might be that the truth or falsity of X is an empirical matter and until the appropriate empirical tests or analyses have been conducted and have rejected X, X must be taken seriously. In other words, X is innocent until proven guilty. Now these statements may not be made in quite the stark manner that I have made them here, but the underlying notion still prevails that because there is a model for X, because questioning the assumptions behind X is not appropriate, and because the testable implications of the model supporting X have not been empirically rejected, we must take X seriously. Q’s model (with X as a result) becomes a chameleon that avoids the real world filters.