Chameleons: The Misuse of Theoretical Models in Finance and Economics

April 11, 2014 Leave a comment

Chameleons: The Misuse of Theoretical Models in Finance and Economics

Paul Pfleiderer

Stanford University

March 2014

Abstract

In this essay I discuss how theoretical models in finance and economics are used in ways

that make them “chameleons” and how chameleons devalue the intellectual currency and

muddy policy debates. A model becomes a chameleon when it is built on assumptions

with dubious connections to the real world but nevertheless has conclusions that are

uncritically (or not critically enough) applied to understanding our economy. I discuss

how chameleons are created and nurtured by the mistaken notion that one should not

judge a model by its assumptions, by the unfounded argument that models should have

equal standing until definitive empirical tests are conducted, and by misplaced appeals to

“as-if” arguments, mathematical elegance, subtlety, references to assumptions that are

“standard in the literature,” and the need for tractability.

Filed under Life

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a comment