Thursday, September 19, 2013

re-SMBC, part 4

Well this one was easy.


(Although, if I were to get pedantic, I'd say the assumptions of microeconomics are rarely exactly true but operate as analogies of very common real-world situations, and the resulting models do really well at explaining those situations. Macro is the same way but the resulting models don't do so well. Perhaps because the assumptions are way too far from the truth, I dunno. I'm not gonna pretend to be a macroeconomist. I barely remember what IS-LM stands for...)

Another note: behavioral economics does better at explaining things partly because it's kind of an increase in the degrees of freedom, but I very much like Matthew Rabin's point on this matter: lambda=0 is the implicit assumption of classical economics, but lambda=2 is a much better assumption and doesn't increase the degrees of freedom at all.

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