Imperfect Knowledge

The present-value model of stock prices is a workhorse in financial economics. The model relates today’s price of a stock (or a basket of stocks) to the market’s forecasts of next-period’s price and dividend, appropriately discounted.

The first part of this text comes back on the standard economic viewpoint on expectational coordination, a viewpoint that the recent events have challenged.

Uncertainty is an unavoidable feature of economic life, although we may cope with it sometimes by ignoring it. Institutions, conventions and behaviour are all conditioned by uncertainty, and they in turn condition uncertainty in a reflexive manner.

My remarks today will be focused primarily on features of the developed world’s financial system which led to the crisis of 2008 and to the Great Recession that followed, from which we are only slowly and painfully emerging.

In his recent lecture at the Cass Business School, Lord Turner noted that even mentioning the possibility of overt monetary financing was akin to breaking a taboo.

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.

US Military needs during the Cold War induced a mathematical modeling of rational allocation and control processes while simultaneously binding that rationality with computational reality. Modeling strategies to map the optimal to the operational ensued and eventually became a driving force in the development of macroeconomic dynamics.

INET’s President introduces a new research program that challenges orthodox assumptions about the limits of economic knowledge

Asset markets are indispensable in harnessing society’s diverse views and insights about future business performance. But those views are shaped as much by emotion and crowd mentality as by rational expectations.

In the face of  laissez-faire capitalism at home and resurgent nationalism across the globe, INET offers an innovative look at the causes of—and solutions for—the problems that ail a fissuring world economy.

“The humility to accept that economic propositions cannot be universal would save us from self-defeating arrogance.” Economist Amit Bhaduri adds his perspective to our Experts on Trial discussion.

As part of an International Economy symposium, INET Research Director Tom Ferguson assessed the challenge facing central bankers through the lens of the missing virtues of Dorothy’s travel companions in the Wizard of Oz

Notes from the Institute’s Director of Research on some significant papers and contributions produced in 2016 under the INET rubric 

In the 40th anniversary year of John Kenneth Galbraith’s Age of Uncertainty, the 1970s look remarkably stable in comparison with today’s turbulent world