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rational expectations hypothesis

shaun p. hargreaves heap

Subject Sociology

DOI: 10.1111/b.9780631221647.2002.x


According to this hypothesis, an individual's expectations regarding future events should not suffer from systematic errors. The reason is simple: you ought to be able to learn about the systematic components of your errors, and there is every incentive to do so since you will profit by removing them. Thus, it is the instrumentally rational agent's ‘eye for the main chance’ (see RATIONAL CHOICE THEORY) which is responsible for the generation of rational expectations; and not unsurprisingly it has been hailed as the natural hypothesis to use in NEOCLASSICAL ECONOMICS. Indeed, together with the so-called natural rate of unemployment hypothesis, it has constituted one of the main planks in the extremely influential NEW CLASSICAL ECONOMICS. In addition, it has greatly simplified the estimation of relationships in ECONOMETRICS. Muth's (1961) original statement of the rational expectations hypothesis was phrased slightly differently. Expectations were to be the ‘predictions of the relevant economic theory’ (p. 316), or more generally the ‘subjective probability distribution of outcomes’ (p. 316) should tend to the ‘objective probability distribution of outcomes’ (p. 316). This way of putting the hypothesis reveals, perhaps, more of the difficulties which have come to be associated with it. Individuals may wish to avoid making systematic errors but closing the gap between the ‘subjective’ ... log in or subscribe to read full text

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