This article analyzes the methodology of modeling in the physical sciences and in
finance. Whereas hobbyists’ models aim for realistic resemblance to the
object of the model, physics models aim for accurate divination. Financial
models, the article argues, can at best aim to extrapolate or interpolate from
the known prices of liquid securities to the unknown values of illiquid ones.
Financial models are therefore best regarded as a collection of mathematically
consistent, parallel “thought universes,” each of which will always
be far too simple to resemble the real financial world, but whose exploration as
a whole can nevertheless provide valuable insight.