Model Thinking Notes

Lectures

1

A

• Why use models?
  • Lots of fields use models
  • Models produce clearer thinking, make you a better thinker
  • Use and understand data
  • Decide, Strategize and design

B

How models make you a better citizen of the world

• "All models are wrong, but some are useful" George EP Box
• Models are the language of business, academia, non-profit, almost all purposes
• Models give us the conditions under which rules are best applied
• Formal models do better than any semi-formal technique
• Models are fertile, a model designed for one system can often be cross applied to other domains
• Models make us humble

C

How models make us clear thinkers

• Step 1: Name the parts
• Step 2: Identify the relationships (between those parts and how things play out)
• Outcomes: Equilibrium, cycle, random, complex
• Identify logical boundaries (identify conditions under which to apply rules)
• Use models to communicate

D

Models and Data

• Models reveal patterns in data
• Models predict points based on given data
• Produces bounds (ex. in ten years inflation will between 0% and 3%)
• Retrodiction (predicting the past), also good for testing the model
• Prediction other factors (the heliocentric universe model predicted neptune)
• Inform data collection
• Estimate hidden parameters
• Calibration

E

How to use models and data

• Ex. banks, showed interdependence and why some were saved
• Monty Hall problem
• Comparative Statics
• Counterfactuals
• Identify and rank levers
• Experimental design
• Institutional Design - a mechanism the means to achieve an end and the closer the final out come is to the desired is the efficiency of the mechanism
• Real time decision aides
• Help choose among policies and institutions

2

A

Sorting and Peer Effect. We hang out with people like us AND we behave like the people we spend time with.

When people think about models they think about equation based models. Agent based models model how individuals with behaviors interact. If the behaviors are optimal, then they are game theory models. The result is outcomes.

B

Schellings Segregation model. Thomas Schelling. This is an agent based model. Peoples decision is whether or not to move. The models shows that if the threshold to move is that less than 1/3 of neighbors need to be similar the final result will be more than 70% similarity. When the threshold is increased to 50%, the final result is over 90% similarity. At 80%, it can't reach equilibrium. This shows that micromotives and macrobehavior may not align. This can also trigger a tipping point because one person leaving can cause others to leave.

C

Index of dissimilarity

sum of |b/B - y/Y| over all cells

D

Peer Effects

Developed by Mark Granovetter. Each person has a threshold at which they will join a movement. The threshold is the number of people who need to have already joined. Collective action is more like with lower thresholds, but varied thresholds helps.

E

The Standing Ovation Model

Like the Grenovetter model, there is a threshold to stand. It is also related to the quality of the show. But you can't directly know the quality, you have a signal with is your perception of quality. So if S>T you stand. Higher quality showes have more standing ovations. Lower threshold leads to standing ovation. If the variation in interpretation (diversity or error) is large, it is more likely to be a standing ovation.

Things that lead to standing ovation

• Higher quality
• Lower threshold
• Larger peer effect
• More variation

This model fails to take into account groups of people going together. It also fails to take into account that people in the front (celebrities) can't see anyone and people in the back can see everyone.

The fertility of this model applies to many areas, such as riots, student grades, urban renewal, fitness/health, and online courses.

Readings

Why Model?

By: Joshua M. Epstein

• Everyone models, but most models are implicit rather than explicit
• Reasons besides predictions to build modles
  1. Explain
  2. Guide data collection
  3. Illuminate core dynamics
  4. Suggest dynamical analogies
  5. Discover new questions
  6. Promote a scientific habit of mind
  7. Bound (bracket_ outcomes to plausible ranges
  8. Illuminate core uncertainties
  9. Offer crisis options in near-real time
  10. Demonstrate tradeoffs / suggest efficiencies
  11. Challenge the robustness of prevailing theory through perturbations
  12. Expose prevailing wisdom as incompatible with available data
  13. Train practitioners
  14. Discipline the policy dialogue
  15. Educate the general public
  16. Reveal the apparently simple (complex) to be complex (simple)
• Many models are fertile, they cross apply to many unrelated domains

The Model Thinker: Prologue, Introduction and Chapter 1

Prologue

We have access to a lot of information. Models are the best means to parse it and choose which rules to apply to it.

Introduction

Combining information with models and contrasting it with facts can lead to decisions (Iceland bank example).

Models don't so much have flaws as they have limited scope. Newtonian physics is an 'incorrect' model with broad application. Multiple models help to compensate by extending scope or focusing scope. Many physical systems can be modeled with a single model or at least explain why they are too complex to model. Human systems tend to be more complex.

• Single Model fallacy - the idea we only need a single best model.
• Ration Choices - most models assume humans make rational choices, but we often do not. In high stakes, low complexity people act rational. In high complexity, well, it's complex.

Phil Tetlock found that single model thinkers, what he called hedgehogs, were worse than random at foretelling the future. It is better to use multiple models.

Chapter 1

• Supertanker example - increasing a tankers size increases it's surface area by a square power but it's volume cubically.
• The same model can explain that elephants have a slower metabolism than mice.