Why Economic Models Are Not Good Estimate of Human Behavior, Essay Example

In theory, economic models are supposed to be good estimates of human behavior. However, the implementation of trade laws and politics related to interactions in the business world prevent this front being reality. Keith argues that “the assumptions used to create a model might not always be true in relation to the real world ie. we acknowledge that people are not always rational”. However, he claims that this unpredictability only occurs a small amount of the time. This does not appear to be true. We can never truly be certain of world economic conditions. The economic depressions that have recently occurred in Greece and Puerto Rico were relatively surprising given the use of forecasting models that were used to understand these economic situations. Since a model relies on stability to be accurate, it is apparent that in the modern world, economic trends are too erratic to be reasonably predicted by any of the existing models. There are too many confounding variables, heavily influenced by trade and politics that cannot be reasonably accounted for in the development of these models or in the analysis of existing trends. Therefore, economic models are not good estimates of human behavior.

To gain a true understanding of economic human behavior, it would be necessary to combine qualitative and quantitative data. Without a thorough understanding of economic data, we cannot reasonably predict trends in human behavior. It is important for these practices to be refined and include both types of data so that we are more able to generate necessary predictions about the state of the world’s economic affairs. Economic models are an understatement of what is possible.