Why Linear (and Piecewise Linear) Models Often Successfully Describe Complex Non-Linear Economic and Financial Phenomena: A Fuzzy-Based Explanation

Authors

Hung T. Nguyen, New Mexico State University - Main CampusFollow
Vladik Kreinovich, The University of Texas at El PasoFollow
Olga Kosheleva, The University of Texas at El PasoFollow
Songsak Sriboonchitta, Chiang Mai UniversityFollow

Publication Date

7-2015

Comments

Technical Report: UTEP-CS-15-59

Abstract

Economic and financial phenomena are highly complex and non-linear. However, surprisingly, in many cases, these phenomena are accurately described by linear models -- or, sometimes, by piecewise linear ones. In this paper, we show that fuzzy techniques can explain the unexpected efficiency of linear and piecewise linear models: namely, we show that a natural fuzzy-based precisiation of imprecise ("fuzzy") expert knowledge often leads to linear and piecewise linear models.

We also discuss which expert-motivated nonlinear models should be used to get a more accurate description of economic and financial phenomena.