Adaptive Expectations Hypothesis - Explained
What is Adaptive Expectations Hypothesis?
Written by J. Mance Gordon
Updated at April 22nd, 2024
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
-
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
- Courses
What is the Adaptive Expectations Hypothesis?
Adaptive Expectations Hypothesis theory states that people adjust their expectations on what the future will be based on experiences and events of the recent past.
Rational Expectations
Adaptive expectation is closely related to rational expectations.
In rational expectations, an individual bases his or her expectations on three factors: available information, past experience, and human reasoning.
The main difference between adaptive expectations and rational expectation is that adaptive expectation uses real time data while rational expectation uses historical data.
Adaptive Expectation Formula
A simple formula for applying adaptive expectation theory to expected inflation in an economy is:
pe = pe-1+ (p-pe-1)
Where:
pe is next years inflation rate that is expected currently
pe-1 is this years inflation rate that was expected the previous year
p is this years actual rate of inflation is between 0 and 1
Related Topics
- Keynesian Perspective of Aggregate Demand
- Recessionary and Inflationary Gap
- Consumption Expenditure
- Investment Expenditure
- Government Spending in Aggregate Demand
- Net Exports in Aggregate Demand
- Keynesian Economic Analysis
- Wage and Price Stickiness
- Coordination Argument of Wage Stickiness
- What are Menu Costs
- Keynesian Assumptions in the Aggregate Demand and Aggregate Supply Model
- Macroeconomic Externality
- Expenditure Multiplier
- The Phillips Curve
- Keynesian Approach to Unemployment and Inflation
- Keynesian Perspective on Market Forces
- NeoClassical Economics
- Long Run Potential GDP
- Physical Capital Affects Productivity
- Potential GDP in the Aggregate Demand Aggregate Supply Model
- Prices are Flexible in the Long Run
- Keynesian and NeoClassical View of Long-Run Aggregate Supply and Demand
- Speed of Macroeconomic Adjustment of Wages and Prices
- Paradox of Rationality
- Rational Expectations Theory
- Shapley Value
- Mechanism Design Theory
- What is the Adaptive Expectations Theory
- Measure Inflation Expectations
- Neoclassical Phillips Curve Tradeoff
- Neoclassical View of Unemployment
- Neoclassical View of Recessions
- Keynesian vs Neoclassical Macroeconomic Policy Recommendations