How to Build an Economic Model in Your Spare Time

Sunday, May 22nd, 2016

Hal Varian explains how to build an economic model in your spare time:

In reality the process is much more haphazard than my description would suggest — the model of research that I describe is an idealization of reality, much like the economic models that I create. But there is probably enough connection with reality to make the description useful — which I hope is also true for my economic models.

The first step is to get an idea. This is not all that hard to do. The tricky part is to get a good idea. The way you do this is to come up with lots and lots of ideas and throw out all the ones that aren’t good.

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The first test is to try to phrase your idea in a way that a non-economist can understand. If you can’t do this it’s probably not a very good idea. If you can phrase it in a way that a noneconomist can understand, it still may be a lousy idea, but at least there’s hope.

Before you start trying to decide whether your idea is correct, you should stop to ask whether it is interesting. If it isn’t interesting, no one will care whether it is correct or not.

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One of the primary purposes of economic theory is to generate insight. The greatest compliment is “Ah! So that explains it!” That’s what you should be looking for — forget about the “nice solid work” and try to become a Wizard of Ahs.

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Write down the simplest possible model you can think of, and see if it still exhibits some interesting behavior. If it does, then make it even simpler.

Several years ago I gave a seminar about some of my research. I started out with a very simple example. One of the faculty in the audience interrupted me to say that he had worked on something like this several years ago, but his model was “much more complex”.

I replied “My model was complex when I started, too, but I just kept working on it till it got simple!”

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