Imperfect Knowledge

This chapter surveys experimental research on networks in economics.

Private data is leaked more and more in our society. Wikileaks, Facebook, and identity theft are just three examples. Network defenses are constantly under attack from cyber criminals, organized hacktivists, and even disgruntled ex-employees.

Economists discussing the problem of radical uncertainty commonly invoke Frank Knight’s classic definition in Risk, Uncertainty and Profit, but only rarely venture to explore the broader contours of his argument.

Does it matter if the Rational Expectations Hypothesis is unrealistic?

The main goal of the macroeconomist is to understand the sources behind business cycles and the behavior of financial markets in the modern economy.

The destruction of trust is not an accident.

In the aftermath of the 2008 financial crisis, distrust in the financial sector was widespread. Even after the mess appeared to be cleaned up, the uncertainty over whether the worst was over remained real.

Finance is built on trust. It is based on promises about tomorrow, often paper promises backed by nothing other than words on a page. When trust in those promises breaks down, so too does the financial system. That is the lesson of thousands of years of history.

“You are now leaving the world as you know it.”

Sadly, it is questionable whether the economy has really improved.

what would measures of systematic risk have indicated to Treasury Secretary Paulsen if they had been available at that time?

Five years after the collapse of the U.S. investment bank Lehman Brothers, the world has still not addressed the fundamental cause of the subsequent financial crisis – an excess of debt. And that is why economic recovery has progressed much more slowly than anyone expected (in some countries, it has not come at all).

What happens when professionals lose touch with the people they’re supposed to serve?