Rational expectations

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Rational expectations

The idea that people rationally anticipate the future and respond today to what they see ahead. This concept was pioneered by Nobel Laureate, Robert E. Lucas, Jr.

Rational Expectations Theory

In economics, a theory stating that economic actors make decisions based on their expectations for the future, which are based on their observations and past experiences. A basic example of rational expectations theory is a situation in which a consumer delays buying a certain good because, based on his/her observations and experiences, he/she believes that the price will be less expensive in a month. If enough consumers believe that, demand eases and the good is likely to actually be less expensive next month. Thus, the consumer waits a month before buying the good. Rational expectations theory states that current expectations strongly influence future performance. Economists disagree about how well the rational expectations theory works in the real world.
References in periodicals archive ?
This attitude could lead executives to conclude they need to be loyal only to their shareholders, regardless of whether their individually rational desires (a quick return on investments) lead collectively to a "damn the torpedoes, full-speed ahead" pursuit of profit at any and all cost.
Individually rational choices were giving rise to collectively irrational results.
In addition to that tendency of investors to take the behavioral aspects of other market players, an important role in determining the individually rational behavior is the market constraints.
For others, such as Joseph Heath in his September essay for this publication, it is individually rational, self-interested decisions that resulted in collectively poor outcomes.
This paper also involves behavioral industrial organization--it notes that one way to make the add-on pricing individually rational rather than just collectively rational for the firms is to add a small population of irrational consumers who buy add-ons only when the high add-on prices are not advertised.
Basically, transnational terrorism creates a classic collective action problem: the best, most secure outcome is achieved by broad cooperation, but it is individually rational for countries not to cooperate, since they will get the benefits of any consequent decrease in terrorism anyway.
Thus, individually rational interior mergers will be inefficient but will always benefit rivals.
In other words, it is individually rational to take the free-rider option if it is available.
Kandori (1992) and Salant (1991) have already demonstrated how these strategies make cooperation individually rational when it is infeasible to commit to a future policy course.
Bagnoli and Lipman [1989] investigate such a voluntary contribution game and show that individual agents have sufficient incentives to voluntarily achieve the Pareto efficient outcome; that is, individually rational behavior will lead to the efficient provision of the public good through purely voluntary contributions.
Perhaps individually rational action, even in reasonably well-structured markets, is able to produce outcomes that are collectively self-defeating.
Health care consumers face a moral hazard (prisoners' dilemma) problem in which it is individually rational to behave in ways that are collectively irrational.

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