Imperfect Knowledge

This essay critically evaluates the benefits and costs of the dominant methodology in macroeconomics, the DSGE approach. Although the approach has led to great progress in some areas, it has also created biases and blind spots in the profession that hold back our understanding and our ability to govern the macroeconomy. There is great scope for progress in macroeconomics by judiciously pushing the boundaries of some of the methodological restrictions imposed by the DSGE approach.

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.

We discuss recent work on bounded rationality and learning in relation to Soros’ principle of reflexivity and stress the empirical importance of non-rational, almost self-fulfilling equilibria in positive feedback systems.

This chapter surveys experimental research on networks in economics.

Tania Singer on the key importance of understanding preferences and behavioral change.

The financial crisis of 2008 was unforeseen to a significant extent. One reason is that the dominant academic theories influencing political decision makers ignore recent advances and instead rely largely on models and decision science dating back to the Second World War.

George Soros, Axel Leijonhufvud and Perry Mehrling in Berlin, Germany (2012).

Financial stability, or the lack thereof.

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.

Economic activity cannot be explained solely by modeling rational behavior. Our partnership with the Kiel Institute brings interdisciplinary scholars together to develop new perspectives on human motivation and decision-making.