When designing models, the underlying assumption is often that the model captures the true data generating process. Does a true model exist? To me, the question is completely irrelevant.

Does a true model exist? Here I’m really thinking models about the financial system. On some abstract level, yes. There is some infinitely complex process that generates all data in the system. The key phrase is infinitely complex.

This means that while a true model may conceptually exist, no model created by human beings can ever expect to get even close to the true model.

So, for all practical purposes, there is no true model. All we left with is one of the perceived risk models.


“All models are wrong but some are useful” George Box 1978