What are rational expectations?
"Rational expectations" is the name of the hypothesis in economics, which states that the result is extremely dependent on what people expect in the future. People's expectations are supported by previous economic situations and information available and relevant. This economic hypothesis also considers the general public to be an important economic agent, unlike considering the government and its politicians, the main players in changing economic results. The economic hypothesis was Muth's countermeasures to the current concept called adaptive expectations. The common basis for both theories is that people adapt to changes and learning from experience, but adaptive expectations claim that people gradually adapt to a certain situation, unlike the idea of rational expectations of Thu people, the ability to learn quickly and adapt to economic situations as they happen. Math Muth later became prominent after other economists such as Robert Lucas Jr., Edward PrescOtt and Neil Wallace.
in rational expectations, two elements, result and expectations, feed and affect each other. What people expect to become will be the driving force of their future actions, which in turn creates the result. On the other hand, this result will create new expectations and the cycle will continue. For example, at currency rates, if people expect depreciation of a certain currency, it will lead to pulling out of their investments, causing this currency to reduce value.
On a larger scale, the expectation of an individual can also influence the expectations of another individual and provoke a collection of the situation. This causes more likely to be expected. In this way, rational expectations believe that a certain economic result is not significantly distinguished from what people expect, making the theory of consistent expectations. This faith applies to applied mathematics, especially in the theory of games that states,That one relies on the predicting of other people's possibilities to be successful in any situation that requires a strategy.
Based on the term rational expectations, it also assumes that people act in a way that will make the most of their sources and profits. Another theory is called the theory of rational selection. He applies this assumption that people usually decide to increase their profits and at the same time reduce costs.