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Roman Frydman

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Roman Frydman is Professor of Economics at New York University and Chair of the Program on Imperfect Knowledge Economics (IKE) at the Institute for New Economic Thinking. He was one of the early critics of the Rational Expectations Hypothesis, arguing in the 1982 article in the American Economic Review that REH models do not provide an adequate representation of rational decision making.

Over the last decade, Frydman has worked with Michael Goldberg on a new approach to representing rationality in formal macroeconomic analysis that rests on the core premise that rational individuals recognize that they cannot fully anticipate the consequences of their decisions.They presented their approach in their book Imperfect Knowledge Economics (Princeton University Press, 2007).

In subsequent articles and a follow-up book, Beyond Mechanical Markets (Princeton University Press, 2011), Frydman and Goldberg developed an alternative approach to modeling rational decision-making and applied it to the analysis of a number of outstanding problems in macroeconomics and finance that have confounded the prevailing approaches for decades. They also showed how IKE leads to a new way of thinking about state intervention – and, more broadly, the market-state balance – in modern economies.

Recently, Frydman co-edited (with Edmund Phelps), Rethinking Expectations: The Way Forward for Macroeconomics (Princeton University Press, 2013), which examines alternative approaches that aim to shape the post-REH research agenda in macroeconomics and policy analysis.

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The Qualitative Expectations Hypothesis

Paper Working Paper Series | | Jun 2017

Model Ambiguity, Consistent Representations of Market Forecasts, and Sentiment 

Stock-Market Expectations: Econometric Evidence that both REH and Behavioral Insights Matter

Paper Working Paper Series | | May 2016

Behavioral finance views stock-market investors’ expectations as largely unrelated to fundamental factors. Relying on survey data, this paper presents econometric evidence that fundamentals are a major driver of investors’ expectations.

A New Rational Expectations Hypothesis: What Can Economists Really Know About the Future?

Paper Conference paper | | Apr 2015

John Muth proposed the Rational Expectations Hypothesis (REH) to represent how the market (an aggregate of its participants) understands and forecasts outcomes. REH imposes internal consistency between the market’s forecasts and “the relevant economic theory” (Muth 1961, p. 316).

Change and Rationality in Macroeconomics and Finance Theory: A New Rational Expectations Hypothesis

Paper Working Paper Series | | Mar 2015

We call attention to the class of models that serve as the foundation for the rational expectations hypothesis (REH). Models in this class rule out completely any structural change that cannot be fully anticipated with a probabilistic or other quantitative rule. REH models are abstractions of rational decision-making, but only in a hypothetical world in which participants can fully anticipate when and how they might revise their understanding of the process driving outcomes.

Featuring this expert

What Can We Really Know About the Future of Stock Prices?

Article | Nov 17, 2015

A gap between theory and reality has haunted economists.

Reawakening

From the Origins of Economic Ideas to the Challenges of Our Time

Event Conference #INET2017 | Oct 21–23, 2017

This fall, hundreds of leading scholars, policymakers and public officials will gather at the Edinburgh International Conference center for the INET 2017 conference.

Modeling a World of Imperfect Knowledge

Article | Dec 21, 2013

Does it matter if the Rational Expectations Hypothesis is unrealistic?