Models and Laws

Physics envy: it’s a term used to describe the almost desperate attempt of the social sciences to be like physics, i.e., have maths, equations and predictability.

Coming up with a mathematical, equation rich representation of things in a social science is extremely hard. Mostly because of that extremely annoying little attribute of humans called free will. Those pesky humans tend do what they like based on their mood, even things that aren’t in their best interest! As someone once said, man isn’t a rational animal; rather, he is a rationalizing animal…

But wait a minute, you say, doesn’t economics (and its cousin, finance) have a lot of equations? Ah, true, but those are just models. Whereas physics has laws (“laws of physics”). What’s the difference between a model and a law? Let Emanuel Derman explain:

“In physics, Maxwell’s theory and quantum mechanics allow you to predict the way an electron spins about its own axis inside a hydrogen atom to an accuracy of twelve decimal places. Something that accurate isn’t just a model—it’s a law. In economics, by contrast, there are no laws at all, only models, and you’re immensely lucky if you can predict up from down.”

But isn’t a defective model better than no model? Actually, that depends on the field. A wrong economic or finance model can ruin lives, and even entire countries. Why then do they keep teaching those flawed models in college courses world over? Nassim Taleb knows exactly why:

“We’re better off with no model than with a defective model, something people understand intuitively, but they tend to forget when they don’t have “skin in the game.” If you are a passenger on a plane and the pilot tells you he has a faulty map, you get off the plane; you don’t stay and say “well, there is nothing better.” But in economics, particularly finance, they keep teaching these models on grounds that “there is nothing better,” causing harmful risk-taking. Why? Because the professors don’t bear the harm of the models.”

Engineers, on the other hand, follow the George Box philosophy:

“All models are wrong, but some are useful.”

Engineers won’t dump a theory even if it is known to be wrong until a newer, better one is formulated. If the parts of the old theory relevant to the engineer’s job are “still an effective way of approximating physical reality”, he’ll use the old theory. That is why engineers still use Newton’s laws when it comes to space launches, not Einstein’s theory which replaced Newton’s theory a century back.

Maybe the social science guys should be like engineers, not like physicists.