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Opinion
Mark Buchanan

Economists, Show Your Assumptions

Economists' models often draw big conclusions based on nutty premises.
It's good for you, except for the health effects. Photographer: Jason Alden/Bloomberg
It's good for you, except for the health effects. Photographer: Jason Alden/Bloomberg

What if I told you that jumping off a cliff is entirely safe, except for gravity? Would you find my prediction insightful or useful? Strange as it may seem, this is precisely the kind of logic that underpins many of the models that economists build to help them understand the world -- and even to make policy recommendations on things such as financial regulation and inequality.

It's a serious flaw to which Stanford University finance professor Paul Pfleiderer has been trying to attract attention. As he argues in a recent paper, theorists make some pretty absurd assumptions to arrive at results or implications that are, in turn, relevant to policy. All too often, people -- including people involved in real policy matters -- ignore those assumptions and end up believing ridiculous things. After all, they've been demonstrated in an economic model.