Elster - Excessive Ambitions

New Article in Capitalism and Society by Jon Elster

The current financial crisis has brought out a fatal flaw in the foundations of the economic theories that guided economic agents and regulators: the unwarranted claim to precision and robustness. In this article I try to diagnose this flaw and discuss possible remedies. I argue that actual agents are intrinsically less sophisticated than the models assume they are, and that the various proposals to sustain the models by appealing to "as-if rationality" all fail. I next consider behavioral economics as an alternative to the standard models, claiming that while they may allow for successful retrodiction, they do not hold out much promise for prediction. I also discuss the use of statistical models, arguing that they are subject to so many traps and pitfalls that only a handful of elite practitioners can be trusted to use them well. Finally, I offer some speculations to explain the persistence in the economic profession and elsewhere of these useless or harmful models.

Elster, Jon (2009) "Excessive Ambitions," Capitalism and Society: Vol. 4 : Iss. 2, Article 1.
DOI: 10.2202/1932-0213.1055
Available at: http://www.bepress.com/cas/vol4/iss2/art1

Both Chiappori and David Hendry respond - link here .


Hendry: "Notwithstanding ‘pitfalls and fallacies in statistical data analysis,' heterogeneous, high-dimensional objects like economies, which are subject to large, intermittent, and usually unanticipated, shifts, require ambitious approaches to characterize their behavior."