Emanuel Derman on the Perils of Pragmamorphism

Wise words:

Models are different. Models are metaphors or analogies. Calling the brain an electronic computer is a model. Calling a computer an electronic brain is a model too. These are analogies, based on similarity, not identity. They are graven images, useful but not very accurate.

Models tell you only what something is more or less like. Theories tell you what something actually is.

In economics one can make only models. The Efficient Market Model that has gone so badly awry compares stock prices to smoke diffusing through a room, and models them with the physics of diffusion. But those are flawed analogies, not theory or fact.

Therefore the similarity of physics and finance lies more in their mathematical language, their syntax rather than their semantics. There is no grand unified theory of everything in finance.

The world is not a model.

Read the whole thing.

Posted by on September 24th, 2011 at 11:52 am


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