Good quote

“Its not even the number of deviations any more”, said one trader, “its that the deviations aren’t standard”

via: RGE – Reverse engineering financial engineering

Here’s the conundrum in economics: looking at historical data to ‘test’ models is tricky, because things are too complex.  And no model is perfect, anyway.  Instead a model is a metaphor, a way to understand the basic forces driving things.  But we need quantitative discipline in the models.  So the important thing is to take the basic message from the historical evidence in the models, but don’t ‘overfit.’  Impossible.  Hence, strong belief in theory, which has been subject to some empirical evidence, and is internally consistent.

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