Roman Frydman is Professor of Economics at New York University, Chair of the INET
Program on Knightian Uncertainty Economics, and Founding Editor of Project Syndicate.
Frydman’s lifelong research has focused on the implications of Knightian uncertainty for
macroeconomics, finance theory, and policymaking. His early work examined the
widespread belief that the Rational Expectations Hypothesis (REH) – which since the
1970s has become the core premise of behavioral and imperfect-information approaches
as well – provides the appropriate standard for modeling forecasting behavior. In
contrast, Frydman argued, in a 1982 article in the American Economic Review that REH
models do not provide an adequate representation of rational decision-making in real world markets.
In the 1990s, Frydman became involved in the post-communist transformation in Eastern
Europe and the former Soviet Union. He was one of the proponents of mass privatization
– a novel approach to distribute equitably state-owned assets to citizens who lacked the
resources to acquire them. His joint research with Andrzej Rapaczynski and others
examined the political economy of the post-communist transformation and involved
extensive empirical studies in ten countries. The results were presented in numerous
articles and eight books (published by Oxford University Press jointly with Central
University Press). This research laid the groundwork for the creation of Project
Syndicate, which initially provided surveys of transition issues and commentaries to
newspapers in fledgling democracies, but has since grown into the world’s largest
provider of original commentaries on vital issues, which are published in more than 500
quality news outlets in over 150 countries.
Over the last two decades, Frydman has returned to his research on macroeconomics and
finance theory. Building on his 1982 AER article, he and Michael Goldberg showed that
the epistemological and empirical difficulties of existing macroeconomic and finance
models stem from their assumption that Knightian uncertainty is irrelevant for
understanding outcomes. They presented the results of this research, which they called
Imperfect Knowledge Economics (IKE) in a number of articles and two books published
by Princeton University Press, Imperfect Knowledge Economics and Beyond Mechanical
Markets.
The arguments advanced by IKE’s critique have played an important role in
developing an approach that would enable economists and policymakers to build
models that recognize that they face Knightian uncertainty. After a multiyear effort,
Roman Frydman, Søren Johansen, Anders Rahbek, and Morten Tabor have completed
the development of such an approach, called the Knightian Uncertainty Hypothesis
(KUH). By recognizing that economists and policymakers face Knightian uncertainty,
KUE models show how both fundamental and psychological considerations drive rational
behavior and market outcomes. Thus, KUH synthesizes the insights contributed by the
major advances in macroeconomic and finance theory – REH and behavioral finance –
since the 1970s. INET’s Research Program on KUE aims to develop this approach as
an alternative to the prevailing paradigm in macroeconomics and finance theory.
