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A theory stating that economic actors make decisions based upon past, recent performance, regardless of the actual state of the economy. Thus, it takes economic actors some time to realize that a recession has ended or is beginning and to adjust their behavior accordingly. Adaptive expectations can result in large losses. See also: Rational expectations, Irrational exuberance.
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adaptive expectations (of inflation)the idea that EXPECTATIONS of the future rate of INFLATION are based on the inflationary experience of the recent past. As a result, once under way, inflation feeds upon itself with, for example, trade unions demanding an increase in wages in the current pay round, which takes into account the expected future rate of inflation which, in turn, leads to further price rises. See EXPECTATIONS-ADJUSTED/AUGMENTED PHILLIPS CURVE, INFLATIONARY SPIRAL, RATIONAL EXPECTATIONS HYPOTHESIS, ANTICIPATED INFLATION, TRANSMISSION MECHANISM.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005