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Beyond Mechanical Markets by Michael D. Goldberg, Roman Frydman

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The Invention of Mechanical Markets

ALTHOUGH THE raison d'être for financial markets implies that they cannot assess asset values perfectly, over the last four decades of the twentieth century, economists developed an approach to macroeconomics and finance that implied that financial markets allocate society's capital almost perfectly. To reach this conclusion, economists constructed probabilistic models that portray an imaginary world in which nonroutine change ceases to be important; indeed, it becomes irrelevant.

An economic theory of the world that starts from the premise that nothing genuinely new ever happens has a particularly simple—and thus attractive—mathematical structure: its models are made up of fully specified mechanical rules ...

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