rational-expectations hypothesisa HYPOTHESIS that suggests that firms and individuals predict future events without bias and with full access to relevant information at the time the decision is to be made. Only ‘new’ information will have an effect on EXPECTATIONS or behaviour.
Business expenditure on investment and stocks is affected greatly by the expectations that businessmen have of the future. These expectations, for instance, are major contributory elements in determining the BUSINESS CYCLE. If businessmen operated under conditions of total knowledge, then the business cycle in its present form would cease to exist. Expectations play a major part in wage-bargaining whereby each side (employers and employees) have to anticipate future events such as the rate of inflation. MONEY ILLUSION would not exist and employment would be based on real wages at all times.
The rational-expectations model is perhaps more applicable to markets approaching PERFECT COMPETITION and is rather less successful when applied to modern macroeconomic problems. See also ECONOMIC MAN.