Economists love their models; can too much loving be dangerous?

Recent financial crises have prompted many to rethink the nature of mathematical modeling of financial markets. 

There is a widely popular joke that whenever you see a group of economists, there is an "orgy of mathematics," and that economics is the only science in which people are awarded the Nobel Prize for saying completely contradictory things. 

If you work in this field or have taken courses in economics or its subspecialty, financial economics (commonly known as finance), you probably know what I mean. 

Let's briefly understand the rationale for financial and economic models through a personal example and then examine some of their effects on the real world.

Although it has been 20 years since I started learning economics, I still vividly remember my first day in an introductory course where we learned about the scientific method and how to apply it to real-world economic phenomena. 

The goal of the lecture was to illustrate supply and demand, the cornerstone of economic theory. A mathematical model was quickly introduced to help predict how sellers and buyers would respond to changes in the price of a good. 

At the end of the lecture, we were expected to be able to "forecast" the impact of a price increase of a competing product on the quantity demanded of another good. 

In one of the homework assignments, I was eager to apply this model to other economic situations, only to find out that our model's predictions were inaccurate if any of the assumptions (some are extremely unrealistic) from the model was violated. 

A few years later in my Ph.D. program, our models got much more interestingly seductive and complex. We once spent an entire month deriving the formula to price European-style stock options (proving the Black-Scholes formula), employing some of the most advanced methods in stochastic calculus, real analysis, topology, partial differential equations and other esoteric math. 

To give you an idea of the level of mathematical rigor, I recall asking several of my classmates, whom I will call Bob (a then recent graduate with a master's degree in applied math at perhaps the world's leading engineering university), Joe (a young fellow with an advanced degree in physics from an elite university in the East), Harry (a graduate degree holder in economics from a top 10 U.S. university) and Johnny (who scored perfectly on the math and analytical sections of the Graduate 

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