Rational Expectations Hypothesis

Definition

The rational expectations hypothesis is an economic theory that states individuals make decisions based on their rational expectations of future events, incorporating all available information. It suggests that people use past experiences and current information to form accurate predictions about the future.

Related terms

Efficient Market Hypothesis: This term refers to the idea that financial markets quickly reflect all available information, making it impossible for investors to consistently achieve above-average returns.

Adaptive Expectations: This term describes how individuals update their expectations based on past events or experiences.

Confirmation Bias:

This term refers to the tendency for people to interpret new evidence in a way that confirms their pre-existing beliefs or expectations.