Beyond Mechanical Markets: Asset Price Swings, Risk, and the Role of the State

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Overview

In the wake of the global financial crisis that began in 2007, faith in the rationality of markets has lost ground to a new faith in their irrationality. The problem, Roman Frydman and Michael Goldberg argue, is that both the rational and behavioral theories of the market rest on the same fatal assumption--that markets act mechanically and economic change is fully predictable. In Beyond Mechanical Markets, Frydman and Goldberg show how the failure to abandon this assumption hinders our understanding of how markets work, why price swings help allocate capital to worthy companies, and what role government can and can't play.

The financial crisis, Frydman and Goldberg argue, was made more likely, if not inevitable, by contemporary economic theory, yet its core tenets remain unchanged today. In response, the authors show how imperfect knowledge economics, an approach they pioneered, provides a better understanding of markets and the financial crisis. Frydman and Goldberg deliver a withering critique of the widely accepted view that the boom in equity prices that ended in 2007 was a bubble fueled by herd psychology. They argue, instead, that price swings are driven by individuals' ever-imperfect interpretations of the significance of economic fundamentals for future prices and risk. Because swings are at the heart of a dynamic economy, reforms should aim only to curb their excesses.

Showing why we are being dangerously led astray by thinking of markets as predictably rational or irrational, Beyond Mechanical Markets presents a powerful challenge to conventional economic wisdom that we can't afford to ignore.

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Editorial Reviews

Financial Times
The debate over how to re-regulate [markets and banks] to avoid another financial crisis is urgent and it cannot conclude without resolving the problem that economics' most basic assumption is flawed. [Beyond Mechanical Markets is one] of the most interesting contributions [to] find a new way to model markets.
— John Authers
Huffington Post
[Beyond Mechanical Markets] marshals a powerful argument that's bolstered by empirical reality: the eternal failures of mechanical forecasting; the sheer difficulty of beating the market with consistency; the unforeseeable ways that history unfolds. . . . [It's approach] seeks to reach beneficial outcomes through flexible, empirical response to [changing] conditions.
— Robert Teitelman
Bloomberg News
[A] groundbreaking look at how to tame asset booms and busts. . . . [O]f all the books I've read on the crisis that began in 2007, this one comes closest to laying foundation for a more pragmatic and genuinely useful school of economics.
— James Pressley
The Times
[Beyond Mechanical Markets points to] a new international order [that] can save lives and stop currencies collapsing.
— Anatole Kaletsky
Financial World
[Beyond Mechanical Markets]'s criticisms are potent and its suggestions intriguing. It would be a pity if they were ignored by economists too busy working on their next theory of everything.
— Keyur Patel
Central Banking.com
The argument of this original and important book is that . . . economic models still used by central banks and others are seriously misleading and basically useless in dealing with a real world in which individuals are making imperfect and unpredictable interpretations of economic events. . . . The authors' practical recommendations for policy are interesting and they can hardly be accused of a lack of boldness.
— Graham Bannock
Financial Times - John Authers
The debate over how to re-regulate [markets and banks] to avoid another financial crisis is urgent and it cannot conclude without resolving the problem that economics' most basic assumption is flawed. [Beyond Mechanical Markets is one] of the most interesting contributions [to] find a new way to model markets.
Huffington Post - Robert Teitelman
[Beyond Mechanical Markets] marshals a powerful argument that's bolstered by empirical reality: the eternal failures of mechanical forecasting; the sheer difficulty of beating the market with consistency; the unforeseeable ways that history unfolds. . . . [It's approach] seeks to reach beneficial outcomes through flexible, empirical response to [changing] conditions.
Bloomberg News - James Pressley
[A] groundbreaking look at how to tame asset booms and busts. . . . [O]f all the books I've read on the crisis that began in 2007, this one comes closest to laying foundation for a more pragmatic and genuinely useful school of economics.
The Times - Anatole Kaletsky
[Beyond Mechanical Markets points to] a new international order [that] can save lives and stop currencies collapsing.
Financial World - Keyur Patel
[Beyond Mechanical Markets]'s criticisms are potent and its suggestions intriguing. It would be a pity if they were ignored by economists too busy working on their next theory of everything.
Central Banking.com - Graham Bannock
The argument of this original and important book is that . . . economic models still used by central banks and others are seriously misleading and basically useless in dealing with a real world in which individuals are making imperfect and unpredictable interpretations of economic events. . . . The authors' practical recommendations for policy are interesting and they can hardly be accused of a lack of boldness.
From the Publisher

Finalist for the 2011 Paul A. Samuelson Award, TIAA-CREF

One of Financial Times (FT.com) non-fiction favourites commended by Martin Wolf, FT chief economics commentator, for 2011

"The debate over how to re-regulate [markets and banks] to avoid another financial crisis is urgent and it cannot conclude without resolving the problem that economics' most basic assumption is flawed. [Beyond Mechanical Markets is one] of the most interesting contributions [to] find a new way to model markets."--John Authers, Financial Times

"[Beyond Mechanical Markets] marshals a powerful argument that's bolstered by empirical reality: the eternal failures of mechanical forecasting; the sheer difficulty of beating the market with consistency; the unforeseeable ways that history unfolds. . . . [It's approach] seeks to reach beneficial outcomes through flexible, empirical response to [changing] conditions."--Robert Teitelman, Huffington Post

"[A] groundbreaking look at how to tame asset booms and busts. . . . [O]f all the books I've read on the crisis that began in 2007, this one comes closest to laying foundation for a more pragmatic and genuinely useful school of economics."--James Pressley, Bloomberg News

"[Beyond Mechanical Markets points to] a new international order [that] can save lives and stop currencies collapsing."--Anatole Kaletsky, The Times

"[Beyond Mechanical Markets]'s criticisms are potent and its suggestions intriguing. It would be a pity if they were ignored by economists too busy working on their next theory of everything."--Keyur Patel, Financial World

"The argument of this original and important book is that . . . economic models still used by central banks and others are seriously misleading and basically useless in dealing with a real world in which individuals are making imperfect and unpredictable interpretations of economic events. . . . The authors' practical recommendations for policy are interesting and they can hardly be accused of a lack of boldness."--Graham Bannock, Central Banking.com

"In their provocative and fascinating new book . . . Frydman and Goldberg's achievement . . . as in their earlier work, is to enlarge the economist's toolkit and to show that there is something useful to be said about uncertainty after all."--Kevin D. Hoover, Journal of Economic Methodology

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Product Details

  • ISBN-13: 9780691145778
  • Publisher: Princeton University Press
  • Publication date: 3/21/2011
  • Pages: 304
  • Product dimensions: 6.40 (w) x 9.30 (h) x 1.10 (d)

Meet the Author

Roman Frydman is professor of economics at New York University. Michael D. Goldberg is the Roland H. O'Neal Professor at the University of New Hampshire. They are the coauthors of "Imperfect Knowledge Economics" (Princeton).

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