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 ?
Michael Woodford shows that while the assumption of rational expectations is unrealistic, a finite-horizon forward planning model can generate results similar to those of a rational expectations equilibrium.
In connection with the latter, the author refers to the hypothesis of rational expectations. The research issue raised in the work should be regarded as non-trivial and practical.
Salter and Luther (2016) argue that they can recast the traditional Austrian business cycle theory (ABCT) within a theoretical framework where agents maintain rational expectations during the boom period and where equilibrium always prevails during the bust.
Our results suggest that the rational expectations hypothesis is not fulfilled, but that the "weak form of rationality" is verified in any time horizon.
HARI said the government's Build Build Build program, which is showing signs of accelerating, has cushioned any negative effects from rational expectations brought about by the recently implemented tax restructuring.
This kind of thinking is common among economists, particularly the generation swept up by the "rational expectations" revolution in macroeconomics.
We first consider a nonstochastic environment and adopt the rational expectations viewpoint.
The authors find that if the policymaker has complete faith in the stationary model, then beliefs and outcomes converge to the stationary rational expectations equilibrium.
The other economic concept to watch under Trump's presidency is the evolution from the long-standing premise in macroeconomics of "rational expectations" to behavioral economics' "predictable irrationality," which incorporates neuroscience and psychology.
Gooden, a writer and novelist, collects rules and principles related to politics, economics, the arts, sciences, physical survival, the internet, life and work, and laws of the land, such as the domino effect, Warren Buffett's rules, Rational Expectations Theory, hemline theory, the Bechdel test, rules of journalism, rules of grammar and usage, writers' rules, the laws of sci-fi writers, planetary naming rules, the laws of thermodynamics, the Van Halen Principle, Murphy's Law, Jim Crow laws, three strikes law, and the Miranda rule.
At an Austrian economics conference in Hartford, Conn., in 1975,1 asked Hayek if he agreed with me that his theory would collapse if people had what economists call "rational expectations." He didn't address my question directly, but said that he didn't believe in rational expectations.
We will also develop a self-confirming equilibrium analysis, which by leaving room for agents to have wrong views about models, can much more naturally confront agents with model uncertainty than the rational expectations approach.