Imperfect Knowledge

John Kay, marvulous as usual, on information and knowledge.

A new book* by Roman Frydman and Michael Goldberg coins the phrase “imperfect knowledge economics” to describe this world of fundamental uncertainty. They use the systematic failure of attempts to analyse exchange rate swings to illustrate the hopelessness of a search for economic explanations that transcend time and place. Frequent discontinuities and transitions in the ways market participants view events mean that economic models, like historical narratives, are context specific. The search for “sharp prediction” – the mantra of the modern scientific economist who seeks to replicate the successes of physics for social science – is doomed to failure.

This seems to be at the heart of exchanges rates. They move to a different tune at different times. The model changes over time. Maybe that is why technical analysis is so prevalent: there is a search for pattern. It suggests that any modelling must try to find the trigger that switches from one model to another.