Recognizing the Limits of Economists' Knowledge, from Imperfect Knowledge Economics: Exchange Rates and Risk

Roman Frydman and Michael D. Goldberg
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Roman Frydman: New York University
Michael D. Goldberg: University of New Hampshire

A chapter in Imperfect Knowledge Economics: Exchange Rates and Risk, 2007 from Princeton University Press

Abstract: 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.

Keywords: knowledge; economic models; predictions; rational self-interest; markets; decisions; exchange rates; risk premiums (search for similar items in EconPapers)
Date: 2007
ISBN: 9780691121604
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Citations: View citations in EconPapers (4)

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