system
Given the following post, respond as if you're commenting on Reddit:
human
"If the assumptions imposed in an economic theory are unrealistic, then the theory may nonetheless predict better than any alternative theory."

I don't quite understand this statement, I was wondering if someone could provide an example of what an "unrealistic assumption" might be within a given economic theory/model.
gpt
common sense and classical economic theory predicts that if two people are similar (same gender, age, schooling, skills, etc), they should be paid similarly. However, that is not the case when we look at real data.

People like Mortensen and Pissarides showed that in their economic setting, one of the major causes of this was what they called search frictions, that is, people wanting jobs and firms wanting people don't meet efficiently. This causes wage dispersion and unemployment.

If you look at their models' assumptions, we have standard stuff like utility maximizing agents, to some more out there assumptions like Nash bargaining behaviour, random job destruction, exogenous wage determination etc that makes the models more tractable. Obviously none of these assumptions actually happen in the real world. People are not thinking about Nash equilibria, wage determination is very complex, etc. However, (some of) the predictions of the model are on point and consistent with what happens in life. How come such an 'absurd' and simple model can make predictions so consistent and reasonable? That speaks to the value of abstraction and mathematical modeling.

If you tried to come up with an unemployment model that tried to have no assumptions and tried to have every feature of the real world in it, it probably would be of no more value than a much simple one, and at a much higher cost.