Checking the weather? Looking at a map of the world to plan your next vacation? Guess what-you’re using a model. While models can be useful for gaining insights that can help us make good decisions, they are simplifications of reality. One example of a model is a weather forecast.
Using data on current and past weather conditions, a meteorologist makes a number of assumptions and attempts to approximate what the weather will be in the future. This model may help you decide if you should bring an umbrella when you leave the house in the morning. However, as anyone who has been caught without an umbrella in an unexpected rain shower knows, reality often behaves differently than a model predicts it will.
Investors can benefit from understanding that the reality of markets, just like the weather, cannot be fully explained by any model. To read more please click here.