How can you identify and evaluate the assumptions underlying economic models using critical thinking?

1 Identifying assumptions

To identify the assumptions in an economic model, it is necessary to read the model description carefully and look for explicit or implicit statements that indicate what is assumed. Common types of assumptions include behavioral assumptions about how economic agents behave, make decisions, and interact; structural assumptions about the features and characteristics of the economic system; and ceteris paribus assumptions that hold other variables constant while focusing on the relationship between two variables of interest. Using background knowledge and common sense can help to infer what is omitted or simplified. Ultimately, these assumptions are necessary to simplify the model and make it tractable, but they can also introduce biases, errors, or limitations.

2 Questioning assumptions

In order to question the assumptions that are made in an economic model, you need to use your critical thinking skills to analyze, evaluate, and compare the assumptions and their consequences. Additionally, you should consider different perspectives, scenarios, and evidence. When questioning assumptions, ask yourself why they are made, how they affect the model results, and how realistic or reasonable they are. You should also consider what is the purpose or goal of the model and how does the assumption serve that purpose or goal? Furthermore, assess how does the assumption affect the model outcome or prediction and what are the alternatives or variations to the assumption? By doing so, you can understand how it makes it more or less accurate, precise, or generalizable and how it reflects the actual behavior, situation, or condition of the economic agents or system.

3 Testing assumptions

Testing assumptions in an economic model is the third step and requires critical thinking skills to apply, synthesize, and communicate the methods and results of testing and assess their validity, reliability, and significance. Data analysis, sensitivity analysis, and scenario analysis are methods that can help with testing assumptions. Data analysis involves using statistical tools to collect, organize, and interpret data relevant to the model and its assumptions. Sensitivity analysis changes the values or ranges of variables or parameters based on assumptions to observe how the model outcome or prediction changes. Scenario analysis creates different scenarios that reflect different sets of assumptions and their implications. Ultimately, these methods can help you better understand how an economic model will perform under different conditions.

4 Challenging assumptions

The fourth step is to challenge the assumptions that are made in an economic model. This means proposing and justifying alternative or improved assumptions that can better explain or predict the economic phenomena of interest. To do this, you should use your critical thinking skills to create, argue, and defend your alternative or improved assumptions. You can challenge assumptions by critiquing them to identify and point out weaknesses, flaws, or gaps in the underlying logic, evidence, or theory. Additionally, you can modify them to make them more realistic, accurate, or precise. You could also replace them with different or better ones that can offer a different or better explanation or prediction. When doing this, it is important to consider the advantages, disadvantages, and implications of your alternative assumptions.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?