De-idealization by commentary: The case of financial valuation models

Ekaterina Svetlova*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

10 Citations (Scopus)

Abstract

Is there a unique way to de-idealize models? If not, how might the possible ways of reducing the distortion between models and reality differ from each other? Based on an empirical case study conducted in financial markets, this paper discusses how a popular valuation model (the Discounted Cash Flow model) idealizes reality and how the market participants de-idealize it in concrete market situations. In contrast to Cartwright's view that economic models are generally over-constrained, this paper suggests that valuation models are under-constrained. This serves as the reason why the relaxation of simplifying assumptions and concretization do not work as methods of de-idealization. The paper finds that financial market participants de-idealize models using commentary that takes the form of judgment. As a conclusion, a hypothesis is formulated that proposes that the more underdetermined the model is the bigger role narrative and other pragmatic elements play in the process of model application.

Original languageEnglish
Pages (from-to)321-337
Number of pages17
JournalSynthese
Volume190
Issue number2
DOIs
Publication statusPublished - Jan 2013
Externally publishedYes

Keywords

  • Economic models
  • Financial models
  • Idealization
  • Judgment
  • Justification

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