Model uncertainty is uncertainty surrounding a model itself, including the model's internal uncertainty estimates.

Uncertainty about models

A useful model is one that is simple enough to be analyzed easily, while nevertheless being similar enough to reality that this analysis can be used as a basis for predictions about the actual world. Unfortunately, it can be difficult to judge whether a given model is in fact similar enough. Furthermore, even if some predictions based on a model come true, this does not necessarily mean that next prediction based on the model will also come true.

A classic illustration of the importance of using appropriate models, as well as the difficulty of noticing when a model is inappropriate, is the 2007 financial crisis. In the years leading up to the crisis, many financial actors made investment decisions on the basis of models that assumed economic stability. Once this simplifying assumption ceased to hold, it became clear that their models had not sufficiently matched reality, and that the outcome of their decisions would be disastrous....

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