Hi, welcome back.

Okay, so, last lecture, we talked about

how using models can make us more
intelligent citizens of the world.
How we could just sort of understand how
the world works a lot better.
How was sort of the new lingo [unknown].
Alright, in this lecture, we're going to
talk about how models make us clear
thinkers, and this is one of the big
reasons why people use models, because
they could help us think more logically
about how the world works.
Okay, so this is sort of a multi-step
process.
So, let's, let's see exactly how it place
out.
So, the first thing you do when you write
down a model is you name the parts.
So, let me take a simple examples.
Suppose I just want to write a model of
where people go for lunch.
And suppose it's a small town, and there's
really just sort of, you know, four
restaurants.
So, there's restaurant 1, restaurant 2,
restaurant 3, restaurant 4.
So, those are parts, right?
But what else is parts?
Another part is people, right?
So, these individuals, and they've got to
decide where to go, right?
Which restaurant do I go to?
Well, now, we have to ask, what are the
relevant parts of the people?
Well, you know, this guy is wearing shoes,
but the thing is his shoes probably aren't
a relevant part.
So, we name the parts really, but what
really matters, and the shoes probably
don't matter.
And what does it matter if he's wearing
mittens or, and if we put a hat on him.
His hat isn't going to have much of an
effect on which restaurant he goes to,
okay?
So, what does matter?
Well, one thing that matter is how much
money he's got, right, and how expensive
these restaurants are.
So, this restaurant may be cheap and this
restaurant may be expensive.
But this may be someone that's got a lot
of money.
So, how much money you have is going to be
one determinant with of which restaurant
you choose.
Another thing that's going to matter is
how much time he has.
Does he have only 15 minutes, right?
Or does he have a whole half hour to go
have lunch, and different restaurants make
it in different amounts of time.
A third thing, maybe and I'll write this
fancy little signal here for preferences.
This is how economists and social
scientists write preferences down, these
are just, you know, what he likes.
Maybe one of these is a Mexican
restaurant, maybe one of these is an
Italian restaurant.
So, he's got different preferences over
the different restaurants.
So, these are all things, these are all
sort of relevant parts that go into the
model, alright?
Once we've laid down the parts, then we've
got to think about the relationships
between those parts.
So, models help us sort of identify the
specific relationship.
What you see on the left is a simple game
theory model.
This is called a extensive form game where
one player, here's player 1, takes, makes
some sort of decision, and then another
player, player 2 takes some sort of
decision, and then the players get
payoffs.
So, once you sort of name the parts, then
the next thing you're going to model is
identify the relationships between those
parts and how things play out.
So now, you got the parts, you got the
relationships.
What you can do is you can think through
the logic.
So, let me show you how complicated this
is and how models are so useful.
Let's do sort of a, a simple thing that I
sometimes play with my undergraduates.
Suppose I want to build a rim for the
earth to be shot through, build a big
basketball.
I'm going to shoot the earth through the
rim, but I want to give a little bit of
space so you can make it.
So, I'm going to put one meter, sort of
all the way around, right?
So, there's a little bit of a gap of one
meter, and then the earth can go through
just that little bit of spacing, one meter
all the way around.
Well, now, I'm going to ask the question,
what should the circumference of that rim
be?
How big around does that rim have to be,
assuming that the earth is, let's just
simplify it and say, it's 25,000 miles
around the equator of the earth.
How big around does that rim have to be if
I want 1 meter of clearance all the way
around?
Think about it.
Okay, now let's do a little math.
So, we know the formula for circumference
of a circle, right?
Circumference is equal to pi times D,
right?
Now, what I want is I want to find the
circumference of that rim and that's going
to be pi but my diameter is going to be
the diameter of the earth.
And if I think about it, remember I've got
this rim here, and I want the earth to go
through, but I want 1 meter on this side,
and I want one meter on that side, so it's
going to be, the diameter of the earth
plus 2 meters.
So the circumference of my rim is going to
be just pi times the diameter of the Earth
plus 2 meters.
Well, that's pretty easy to, to solve,
right?
Because that's just going to be pi times
the diameter of the earth plus pi times 2
meters.
Well, pi times the diameter of the earth,
you already said, was 25,000, and pi times
2 meters is just going to be 6.28 meters.
So, the circumference is going to be
25,000 and 6.28 meters.
So, that's probably not what most of you
guessed, right?
So, by writing down a very simple model,
just a, you know, model for the
circumference of a circle, we're able to
figure out exactly how big that room has
to be, and it's often very different,
right, from what our intuition would have
suggested.
Okay.
So, working through the logic is a big
reason why models make us clear thinkers.
Now, the next thing models do is they
allow us to inductively explore.
So, let me give a, sort of a fun example
of this.
Suppose you have a room, right, and we've
got this room here.
And there's a door, there's one little
door right here that people can come out
of and the problem is jammed in the door,
right, so that, you know, as people try to
exit this room, somebody gets jammed in
the door.
So, the question is like, how do you
figure out a better way to prevent people
from getting jammed?
But one thing you might do is you might
put a post right here.
And this post might prevent people from
you know, bumping into each other as they
come out because they come here and they
sort of bump into the post and they have
to go around and that prevents things
from, from sort of getting bunched up near
the door.
So, the interesting here is once you
construct a model of the room, when you
put a bunch of people in the room, right,
so heres people and then you have them run
out, you can ask, whats the effect going
to be of putting the post and can
conductively explore better ways to sort
of position things in the room to prevent
people from getting piled up, okay?
Now, once we've sort of went through the
logic and explored things, we can ask
what, what exactly happens in our model.
Now remember, when we talked about types
of outcomes earlier on.
I said, theres only four things that can
happen in a model.
One is It can go to some sort of nice
equilibrium, like the planets, you know, I
mean, like, I'm sorry, like, if I drop my
pen, it rests on the floor in equilibrium.
It can be some kind of cycle, right, like
the planets orbiting the sun.
It can be completely random, right, it can
be just, you know, totally unpredictable
and random, or it can be complex.
And so, one thing that models like, let us
do is figure out which of those things is
going to happen.
So, let me throw something out there.
Suppose we're looking at oil, which is a
commodity and we want to ask what about
the price of oil?
What about the demand for oil?
What can we say about those things.
Well, let's think about it.
The demand for oil is, you know, probably,
you can depend on the size of the economy.
And so therefore, you'd expect since the
economy tends to grow at a fairly constant
rate, you'd expect, you know, the demand
for the total supply of oil to probably
slope up, right?
What about the price of oil?
Well, the price of oil depends on a whole
bunch people who are sort of have some,
you know, they might have some in reserve,
and they're bargaining and they're buying
and selling, and all sorts of crazy stuff
can go on.
So, if I were going to make a guess, I
would say, you know, that the supply of
oil is some sort of nice pattern, right?
The total world demand and supply of oil
is probably a nice pattern, but if I look
at the price of oil, it's probably crazy,
okay?
And so, in fact, if you look at it, that's
exactly what we see.
So, here's oil production right here, and
that satisfy sort of this nice upward
slope.
But if you look at the price of oils, the
price of oil which is down here, that's
just crazy.
It's completely unpredictable.
It's what we call complex.
It's not random, right, but it's complex.
So, the model, sort of if we construct
models of these two things, we can see
why, you know, total production of oil
goes up and why the price of oil is so
hard to understand, okay?
Next, identify logical boundaries.
This is one of my favorites.
So, there's a website called opposite
proverbs.
And on this website, you see these
statements like these two.
Two heads are better than one, and that's
certainly true.
Often, it's the case that two heads are
better than one.
And too many cooks spoil the broth and
that's often true as well, right?
It is true that too many cooks do spoil
the broth.
Well, here's the problem.
There's, are the opposite, right?
The same is with a stitch in time saves
nine, and he who hesitates is lost.
So, if you just have these sort of
proverbs or mantras that you sort of
follow, they're not going to do any good
because there's always going to be an
opposite proverb that you know, says, do
the op, do the opposite thing.
So, which one do you follow?
What models enable us to do is find the
conditions under which one thing holds and
one thing doesn't.
So later in this course, we're going to
see, when is it exactly the case that two
heads are better than one, and when is it
exactly the case that too many cooks spoil
the broth?
So, even though these proverbs are
opposite, there are conditions under which
each one holds, alright?
Okay.
Last thing.
Communicate.
One of the real beauties of models is they
allow us to communicate our ideas and what
we know really simply.
So, let's take politics, for instance.
And suppose you want to ask me, Scott, how
do you, how do people vote exactly?
Now, I can say you know, petty [unknown] I
think that people, you know, they like
candidates, they don't like candidates.
And then there's issues, there's these
things called issues.
And it, there's a question like, you know,
is the candidate, did they take positions
on issues that you like, or they don't
take positions on issues you like and
they, they balance these things and they
watch debates.
And it can go on and on and on and you
might really have no idea, when I'm done,
how I think people vote.
Well, let's place some standards with our
simple model and I said, okay, so, here's
how it works.
There's going to be a voter and there's
going to be two candidates, so here's my
voter and here's candidate 1 and here's
candidate 2.
Now, what the voter does for each of these
candidates is, they've got some sort of
likability.
So, they can say, so there's likability of
candidate 1 and there's likability of
candidate 2.
And this is just sort of like, you know,
how friendly do they seem, do they seem
trustworthy, do they seem honest, that
sort of stuff.
So, this is, you know, we'll put
Likability here.
Now, the second thing that I'm going to
say is that people care about policy.
Now, for policy, what they care about is
sort of this set of issues.
So you can think of policies, what I'm
going to say is the voter, I'm going to
put a little left right continuum, to say
the voter over here is going to be a
little bit conservative, right?
And then, for these candidates, I'm going
to say, well, candidate 1 is over here.
He's kind of liberal.
And candidate 2 is really conservative,
right, over here.
So, this is what candidate 2 is.
So now, here's my model of how people
vote.
What they do is they sort of, say, okay,
well, how likable is each candidate,
right, so look at the likability of
candidate 1 and the likability of
candidate 2.
And then, they ask, how far apart is,
here's my sort of policy, you know, I may
be a little bit to the right.
How close are these candidates to me?
Well, candidate 1 is, is pretty far away.
Candidate 2 is a little bit closer.
So then, how people vote depends on the
combination of these two things,
likability, and how close somebody is on
policy space.
Notice how that's a much clearer way of
explaining exactly how I think and enables
me to communicate much more clearly to
other people how is it that I vote, okay?
Alright.
So, that's how models make us clearer
thinkers.
Now, what we're going to do next, once we
sort of, you know, got this understanding
of models helping us think logically, is
we could take those logical models and
bring them to data.
Thank you.