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

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

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Princeton University Press


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

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.

Product Details

ISBN-13: 9780691145778
Publisher: Princeton University Press
Publication date: 03/21/2011
Pages: 304
Product dimensions: 6.40(w) x 9.30(h) x 1.10(d)

About 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).

Table of Contents

  • FrontMatter, pg. i
  • Contents, pg. vii
  • Acknowledgments, pg. xiii
  • What Went Wrong and What We Can Do about It, pg. 1
  • 1. The Invention of Mechanical Markets, pg. 21
  • 2.The Folly of Fully Predetermined History, pg. 41
  • 3. The Orwellian World of “Rational Expectations”, pg. 55
  • 4.The Figment of the “Rational Market”, pg. 71
  • 5. Castles in the Air: The Efficient Market Hypothesis, pg. 81
  • 6.The Fable of Price Swings as Bubbles, pg. 103
  • 7. Keynes and Fundamentals, pg. 117
  • 8. Speculation and the Allocative Performance of Financial Markets, pg. 149
  • 9. Fundamentals and Psychology in Price Swings, pg. 163
  • 10. Bounded Instability: Linking Risk and Asset-Price Swings, pg. 175
  • 11. Contingency and Markets, pg. 195
  • 12. Restoring the Market-State Balance, pg. 217
  • Epilogue, pg. 249
  • References, pg. 257
  • Index, pg. 273

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