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

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. 



  • Rethinking Expectations: The Way Forward for Macroeconomics

    Roman Frydman & Edmund S. Phelps (Editors)
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    This book originated from a 2010 conference marking the fortieth anniversary of the publication of the landmark "Phelps volume," Microeconomic Foundations of Employment and Inflation Theory, a book that is often credited with pioneering the currently dominant approach to macroeconomic analysis. However, in their provocative introductory essay, Roman Frydman and Edmund Phelps argue that the vast majority of macroeconomic and finance models developed over the last four decades derailed, rather than built on, the Phelps volume's "microfoundations" approach. Whereas the contributors to the 1970 volume recognized the fundamental importance of according market participants' expectations an autonomous role, contemporary models rely on the rational expectations hypothesis (REH), which rules out such a role by design.

    The financial crisis that began in 2007, preceded by a spectacular boom and bust in asset prices that REH models implied could never happen, has spurred a quest for fresh approaches to macroeconomic analysis. While the alternatives to REH presented in Rethinking Expectations differ from the approach taken in the original Phelps volume, they are notable for returning to its major theme: understanding aggregate outcomes requires according expectations an autonomous role. In the introductory essay, Frydman and Phelps interpret the various efforts to reconstruct the field--some of which promise to chart its direction for decades to come.

    The contributors include Philippe Aghion, Sheila Dow, George W. Evans, Roger E. A. Farmer, Roman Frydman, Michael D. Goldberg, Roger Guesnerie, Seppo Honkapohja, Katarina Juselius, Enisse Kharroubi, Blake LeBaron, Edmund S. Phelps, John B. Taylor, Michael Woodford, and Gylfi Zoega.

  • Beyond Mechanical Markets: Asset Price Swings, Risk, and the Role of the State

    Roman Frydman and Michael D. Goldberg
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    In the wake of the global financial crisis that began in 2007, faith in the rationality of markets has lost ground to a new faith in their irrationality. The problem, Roman Frydman and Michael Goldberg argue, is that both the rational and behavioral theories of the market rest on the same fatal assumption--that markets act mechanically and economic change is fully predictable. In Beyond Mechanical Markets, Frydman and Goldberg show how the failure to abandon this assumption hinders our understanding of how markets work, why price swings help allocate capital to worthy companies, and what role government can and can't play. (Princeton University Press)


  • Imperfect Knowledge Economics: Exchange Rates and Risk

    Roman Frydman and Michael D. Goldberg
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    Posing a major challenge to economic orthodoxy, Imperfect Knowledge Economics asserts that exact models of purposeful human behavior are beyond the reach of economic analysis. Roman Frydman and Michael Goldberg argue that the longstanding empirical failures of conventional economic models stem from their futile efforts to make exact predictions about the consequences of rational, self-interested behavior. Such predictions, based on mechanistic models of human behavior, disregard the importance of individual creativity and unforeseeable sociopolitical change. Scientific though these explanations may appear, they usually fail to predict how markets behave. And, the authors contend, recent behavioral models of the market are no less mechanistic than their conventional counterparts: they aim to generate exact predictions of "irrational" human behavior.

    Frydman and Goldberg offer a long-overdue response to the shortcomings of conventional economic models. Drawing attention to the inherent limits of economists' knowledge, they introduce a new approach to economic analysis: Imperfect Knowledge Economics (IKE). IKE rejects exact quantitative predictions of individual decisions and market outcomes in favor of mathematical models that generate only qualitative predictions of economic change. Using the foreign exchange market as a testing ground for IKE, this book sheds new light on exchange-rate and risk-premium movements, which have confounded conventional models for decades.

    Offering a fresh way to think about markets and representing a potential turning point in economics, Imperfect Knowledge Economics will be essential reading for economists, policymakers, and professional investors. (Princeton University Press)


  • Knowledge, Information, and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps

    Ed. Philippe Aghion, Roman Frydman, Joseph E. Stiglitz, Michael Woodford
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    Macroeconomics would not be what it is today without Edmund Phelps. This book assembles the field's leading figures to highlight the continuing influence of his ideas from the past four decades. Addressing the most important current debates in macroeconomic theory, it focuses on the rates at which new technologies arise and information about markets is dispersed, information imperfections, and the heterogeneity of beliefs as determinants of an economy's performance. The contributions, which represent a breadth of contemporary theoretical approaches, cover topics including the real effects of monetary disturbances, difficulties in expectations formation, structural factors in unemployment, and sources of technical progress. Based on an October 2001 conference honoring Phelps, this incomparable volume provides the most comprehensive and authoritative account in years of the present state of macroeconomics while also pointing to its future. (Princeton University Press)