Posing a major challenge to economic orthodoxy, Imperfect Knowledge Economics asserts that exact models of purposeful human behavior are beyond the reach of economic analysis. Roman Frydman and Michael Goldberg argue that the longstanding empirical failures of conventional economic models stem from their futile efforts to make exact predictions about the consequences of rational, self-interested behavior. Such predictions, based on mechanistic models of human behavior, disregard the importance of individual creativity and unforeseeable sociopolitical change. Scientific though these explanations may appear, they usually fail to predict how markets behave. And, the authors contend, recent behavioral models of the market are no less mechanistic than their conventional counterparts: they aim to generate exact predictions of "irrational" human behavior.
Frydman and Goldberg offer a long-overdue response to the shortcomings of conventional economic models. Drawing attention to the inherent limits of economists' knowledge, they introduce a new approach to economic analysis: Imperfect Knowledge Economics (IKE). IKE rejects exact quantitative predictions of individual decisions and market outcomes in favor of mathematical models that generate only qualitative predictions of economic change. Using the foreign exchange market as a testing ground for IKE, this book sheds new light on exchange-rate and risk-premium movements, which have confounded conventional models for decades.
Offering a fresh way to think about markets and representing a potential turning point in economics, Imperfect Knowledge Economics will be essential reading for economists, policymakers, and professional investors.
"[T]he challenge that existing economic orthodoxy may find most disconcerting is Imperfect Knowledge Economics (IKE), the name of a path-breaking recent book."--Anatole Kaletsky, The Times (London)
". . . sets out an alternative approach to prediction, in which the forecaster recognizes that his model will inevitably be less than perfect."--The Economist
"A new book ... coins the phrase "imperfect knowledge economics" to describe this world of fundamental uncertainty."--Finanical Times
"A new conceptual framework--Imperfect Knowledge Economics (IKE)--provides the rationale for policy intervention in asset markets, and also has important implications for how regulators should measure and manage systemic financial risk."--Edmund Phelps, Guardian.co.uk
"This marvelous book by Frydman and Goldberg documents . . . invaluable insights of the 'early modern' theory of capitalism that were lost when the profession endorsed rational expectations equilibrium. . . . Happily for me and, I believe, for the profession of economics, this deeply original and important book gives signs of bringing us back on track--on a road toward an economics possessing a genuine microfoundation and at the same time a capacity to illuminate some of the many aspects of the modern economy that the rational expectations approach cannot by its nature explain."--from the foreword by Edmund S. Phelps, winner of the 2006 Nobel Prize in economics
Table of Contents
This book has been translated into:
Other Princeton books authored or coauthored by Edmund S. Phelps:
Other Princeton books authored or coauthored by Roman Frydman:
Another Princeton book authored or coauthored by Michael D. Goldberg: