Adaptive Expectations Hypothesis

AAA

DEFINITION of 'Adaptive Expectations Hypothesis'

A hypothesis stating that individuals make investment decisions based on the direction of recent historical data, such as past inflation rates, and adjust the data (based on their expectations) to predict future rates.

INVESTOPEDIA EXPLAINS 'Adaptive Expectations Hypothesis'

For example, if inflation over the last 10 years has been running in the 2-3% range, investors would use an inflation expectation of that range when making investment decisions. Consequently, if a temporary extreme fluctuation in inflation occurred recently, such as a cost-push inflation phenomenon, investors will overestimate the movement of inflation rates in the future. The opposite would occur in a demand-pull inflationary environment.

RELATED TERMS
  1. Expectations Theory

    The hypothesis that long-term interest rates contain a prediction ...
  2. Cost-Push Inflation

    A phenomenon in which the general price levels rise (inflation) ...
  3. Demand-Pull Inflation

    A term used in Keynesian economics to describe the scenario that ...
  4. Inflation

    The rate at which the general level of prices for goods and services ...
  5. Bond

    A debt investment in which an investor loans money to an entity ...
  6. Policyholder Surplus

    The assets of a mutual insurance company minus its liabilities. ...
Related Articles
  1. Cost-Push Inflation Versus Demand-Pull ...
    Entrepreneurship

    Cost-Push Inflation Versus Demand-Pull ...

  2. Understanding Investor Behavior
    Active Trading Fundamentals

    Understanding Investor Behavior

  3. Advanced Bond Concepts
    Bonds & Fixed Income

    Advanced Bond Concepts

  4. Bond Basics Tutorial
    Retirement

    Bond Basics Tutorial

comments powered by Disqus
Hot Definitions
  1. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  2. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  3. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  4. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  5. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  6. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
Trading Center