THE “Rational” AND “Adaptive” Expectations Theory

Two Well Known But Doubtful Economic Theories

Courtesy: www.CertifiedMedicalPlanner.org

[By Staff Reporters]

1 – RATIONAL EXPECTATIONS state that one will conform to what can logically be expected in the future. That is, a person will invest, save or spend according to what s/he rationally believes will happen in the future. An investor thinks a stock is going to go up, and by buying it, this act actually causes the stock to go up.

LINK: https://www.springerpub.com/dictionary-of-health-economics-and-finance-9780826102546.html

DOUBT: An investor notices that a stock is undervalued, buys it, and watches as other investors notice the same thing, thus pushing the price up to its proper market value. This creates a self-fulfilling prophecy that helps bring about the future event. So, RE can be changed to explain everything, but it tells us nothing.

2 – ADAPTIVE EXPECTATIONS suggest that people form their expectations about what will happen in the future based on what has happened in the past.

DOUBT: Past data is only one of many factors that influence future behavior. In the financial world, change is the only true constant.

ESSAY: https://medicalexecutivepost.com/2013/04/24/more-on-money-psychology/

ESSAY: https://medicalexecutivepost.com/2014/08/08/on-financial-psychology-and-money-scripts/

ASSESSMENT: Your thoughts and comments are appreciated.

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BUSINESS, FINANCE, INVESTING AND INSURANCE TEXTS FOR DOCTORS

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