Economic Models as Analogies

Authors


  • We thank the many colleagues and friends with whom we have discussed the issues addressed here over the years. We thank Hervé Crès, Robin Cubitt, Eddie Dekel, Brian Hill, Doron Ravid, Jack Vromen, Bernard Walliser, three referees and the editor for comments on earlier drafts of this study. We also thank Daria Engel and Kartin Kish for their research assistance. We gratefully acknowledge ISF Grant 396/10 (Gilboa and Schmeidler), ERC Grant 269754 (Gilboa), and NSF Grants SES-0961540 (Postlewaite) and SES-1153893 (Samuelson).

Abstract

People often wonder why economists analyse models whose assumptions are known to be false, while economists feel that they learn a lot from such exercises. We suggest that part of the knowledge generated by academic economists is case-based rather than rule-based. That is, instead of offering general rules or theories that should be contrasted with data, economists often analyse models that are ‘theoretical cases’, which help understand economic problems by drawing analogies between the model and the problem. Thus, economic models, empirical data, experimental results and other sources of knowledge are all on equal footing, that is, they all provide cases to which a given problem can be compared. We offer complexity arguments that explain why case-based reasoning may sometimes be the method of choice and why economists prefer simple cases.

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