Economics vs. Real Life in One Minute: The Ultimatum Game, Complexity and Data Reliability Issues
Far too many times, we come across economic models that seem downright brilliant on paper: top-notch math, logic, you name it... yet when they end up being implemented in the proverbial real world by for example being included in economic policy choices, said models disappoint.
Why?
Simply because in real life, things are (unfortunately for forecasters) ridiculously complex. "Ceteris paribus" seems like a reasonable thing to say, right... all things being equal, in other words? But that is precisely the problem when analyzing ultra-complex system with a wide range of oftentimes-unpredictable variables, they're not :)
Instead, you end up having no choice but to accept the limitations of in our case economics. And that is not necessarily a bad thing. As The Ultimatum Game and the other arguments presented throughout this video (primarily arguments pertaining to the complexity and data/assumption reliability dimension) make clear, we are dealing with an ultra-complex equation. And that is fine, hardly the end of the world.
Instead, this reality simply makes it clear that to maximize results, deploying humility is the way to go, among other things by also incorporating insights from other disciplines such as psychology, political science or sociology. Again, hardly the end of the world and instead, think of it as an opportunity to move away from delusions of grandeur and toward providing real-world value. Fair enough?
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