Adaptive Expectations Hypothesis

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.

BREAKING DOWN '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. Hypothesis Testing

    A process by which an analyst tests a statistical hypothesis. ...
  2. Type II Error

    A statistical term used within the context of hypothesis testing ...
  3. Cost-Push Inflation

    A phenomenon in which the general price levels rise (inflation) ...
  4. Inflation Trade

    A method of investing that seeks to profit from an overall increase ...
  5. Base Effect

    The consequence of abnormally high or low levels of inflation ...
  6. Null Hypothesis

    A type of hypothesis used in statistics that proposes that no ...
Related Articles
  1. Fundamental Analysis

    What Causes Inflation in the United States

    Inflation is the main catalyst behind U.S monetary policy. But what causes this phenomenon of sustained rising prices? Read on to find out.
  2. Economics

    Macroeconomics: Inflation

    By Stephen Simpson Inflation is a key concept in macroeconomics, and a major concern for government policymakers, companies, workers and investors. Inflation refers to a broad increase in prices ...
  3. Retirement

    Inflation: Conclusion

    After reading this tutorial, you should have some insight into inflation and its effects. For starters, you now know that inflation isn't intrinsically good or bad. Like so many things in life, ...
  4. Forex

    Inflation

    An in-depth look at inflation
  5. Retirement

    Inflation: What Is Inflation?

    Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys ...
  6. Investing Basics

    Inflation's Impact On Stock Returns

    When stocks are divided into growth and value categories, the evidence is clear that value stocks perform better in periods of high inflation, and growth stocks perform better during periods ...
  7. Retirement

    Inflation And Your Retirement

    When you're setting financial goals and saving for retirement, don't forget to factor in inflation. Here's how to fight back and protect your future.
  8. Active Trading Fundamentals

    Hypothesis Testing in Finance: Concept & Examples

    When you're indecisive about an investment, the best way to keep a cool head might be test various hypotheses using the most relevant statistics.
  9. Fundamental Analysis

    What is a Null Hypothesis?

    In statistics, a null hypothesis is assumed true until proven otherwise.
  10. Professionals

    Price Changes in the Economy

    FINRA Series 6 Exam Study Guide - Price Changes in the Economy. In this section, two types of Inflation, demand-pull and cost-push inflation. Deflation, contrary to inflation, is the persistent ...
RELATED FAQS
  1. Why are P/E ratios generally higher during times of low inflation?

    Inflation affects equity prices in several ways. Most importantly, investors are willing to pay less for a certain level ... Read Answer >>
  2. How does inflation affect fixed-income investments?

    Learn about the ways inflation can harm fixed-income investments. Find out how to monitor the impact of inflation using common ... Read Answer >>
  3. What is inflation and how should it affect my investing?

    Inflation, an economic concept, is an economy-wide sustained trend of increasing prices from one year to the next. The rate ... Read Answer >>
  4. How can inflation be good for the economy?

    Find out why some economists and public policy makers believe that inflation is a good, or even necessary, phenomenon to ... Read Answer >>
  5. When is the best time to buy a fixed income security?

    Determine the optimal time to buy fixed income securities; the key is inflation and interest rates falling, which makes the ... Read Answer >>
  6. What does a strong null hypothesis mean?

    Find out what null hypothesis is and why it is important to the scientific method. See how statisticians and economists use ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center