This Chapter discusses the meaning and purpose of modelling, and illustrates some core aspects with a few simple examples. The first sections discuss modelling from a general perspective, whilst the subsequent materials focus exclusively on financial modelling and data analysis.
At this general level, models can exist in many forms, including:
In general, models do not perfectly capture every aspect of a situation: Indeed, a “model” which did so would essentially no longer be a model! There are almost always features or behaviours of the real-life situation that cannot be captured exactly (even if these are unusual behaviours that could arise only rarely or in highly specific circumstances).
Part of the “art” of modelling is to capture the key elements in a way that is sufficient to fulfil the particular purpose. Some important reflections to bear in mind, in almost all situations (the the simplest to the most complex) include:
There are many areas of application, including:
In general, a modelling process consists of three stages: