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.

  1. Inflation

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

    A debt investment in which an investor loans money to an entity ...
  3. Demand-Pull Inflation

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

    A phenomenon in which the general price levels rise (inflation) ...
  5. Expectations Theory

    The hypothesis that long-term interest rates contain a prediction ...
  6. U.S. Savings Bonds

    A U.S. government savings bond that offers a fixed rate of interest ...
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