Imperfect Knowledge Economics: Exchange Rates and Risk

Roman Frydman & Michael D. Goldberg
Foreword by Edmund S. Phelps

For more information about this book, including endorsements, table of contents, foreword by Edmund S. Phelps, as well as a downloadable sample of Chapter 1, please visit the Princeton University Press site.

See Joseph M. Santos’s review in Eastern Economic Review.

Read about the book in Anatole Kaletsky's op-eds in Prospect Magazine, “Goodbye, homo economicus,” and in The Times, "Now is the time for a revolution in economic thought," John Kay’s Financial Times op-ed, “Beware the fruitless search for ‘sharp prediction’”, and in The Economist’s Economics Focus article, “A new fashion in modeling”.

You can also read about the book in "Glem alt om precision" ("Forget About Precision"), Weekend Avisen (Denmark), Bloomberg on the Economy, Bloomberg Radio (USA), and "Are Markets Rational?", The International Economy Magazine (USA).

Press Release

Why have economists' models failed to account for what happens in real-world markets? What drives aggregate outcomes? Is "self-interest" really sufficient to understand economic rationality? What is the role of history, the social context and common values? How should economic models be used by policymakers and professional investors?

In his 1974 Nobel lecture, Friedrich Hayek appealed to fellow economists to resist the "pretence of exact knowledge" in economic analysis. Decades later, his experience as Federal Reserve chief led Alan Greenspan to recognize that contemporary economists' models have limited usefulness in policymaking. Yet, over the last three decades, economists have come to believe that their models cannot be scientific unless they generate "sharp" predictions of market outcomes. Among finance professionals, the buzzword has become "financial engineering," as if exact mathematical models could ultimately capture what real-world markets do.

But these models have consistently failed empirically. In their provocative new book, Imperfect Knowledge Economics (IKE), Roman Frydman and Michael Goldberg explain why, attributing conventional economic models' shortcomings to their futile effort to make exact predictions. As John Kay, writing about the book in The Financial Times, put it, "the quest for exact knowledge gets in the way of useful knowledge."

Drawing attention to the inherent limits of economists' knowledge, the book begins a long overdue attempt to make rigorous economic analysis relevant for real-world problems, from trading in financial markets to formulation and discussion of public policy. Using the foreign exchange market as a testing ground for IKE, the 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 economic analysis, Imperfect Knowledge Economics will be essential reading for economists, policymakers, professional investors, and all who seek to understand the uses — and abuses — of economic and financial models.